<PAGE> 1
SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1999.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file No. 333-3954
IMC MORTGAGE COMPANY
(Exact name of issuer as specified in its Charter)
Florida 59-3350574
-----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
5901 E. FOWLER AVENUE
TAMPA, FLORIDA 33617
(Address of Principal Executive Offices)
Issuer's telephone number, including area code: (813) 984-2548
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Title of each Class: Outstanding at November 12, 1999
- -------------------------------------- ---------------------------------
Common Stock, par value $.01 per share 34,201,380
<PAGE> 2
IMC MORTGAGE COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 1
Consolidated Statements of Operations
for the three months and the nine months ended
September 30, 1999 and September 30, 1998 2
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999
and September 30, 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 23
Item 3. Quantitative and Qualitative Disclosure About Market Risk 44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 45
Item 2. Changes in Securities 45
Item 3. Defaults Upon Senior Securities 45
Item 4. Submission of Matters to a Vote of Security Holders 46
Item 5. Other Information 46
Item 6. Exhibits and Reports on Form 8-K 46
</TABLE>
<PAGE> 3
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 19,208 $ 15,454
Accrued interest receivable 7,022 10,695
Accounts receivable 64,065 44,661
Mortgage loans held for sale, net 514,573 946,446
Interest-only and residual certificates 314,133 468,841
Property, furniture, fixtures and equipment, net 10,156 17,119
Mortgage servicing rights 38,025 52,388
Income tax receivable 7,801 12,914
Goodwill -- 89,621
Other assets 18,604 25,500
----------- -----------
Total $ 993,587 $ 1,683,639
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Warehouse finance facilities $ 568,448 $ 984,571
Term debt 398,892 415,331
Notes payable 17,031 17,406
Accounts payable and accrued liabilities 16,083 15,302
Accrued interest payable 9,761 3,086
----------- -----------
Total liabilities 1,010,215 1,435,696
----------- -----------
Commitments and contingencies (Note 8)
Redeemable preferred stock (redeemable at
maturity at $100 per share and, under certain
circumstances, upon a change in control) 39,544 37,333
----------- -----------
Stockholders' equity (deficit):
Common stock, par value $.01 per share; 50,000,000
authorized; and 34,201,380 and 34,139,790 shares
issued and outstanding 342 341
Additional paid-in capital 251,928 251,633
Accumulated deficit (308,442) (41,364)
----------- -----------
Total stockholders' equity (deficit) (56,172) 210,610
----------- -----------
Total $ 993,587 $ 1,683,639
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
1
<PAGE> 4
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Gain on sales of loans $ 5,738 $ 53,604 $ 37,377 $ 184,743
------------ ------------ ------------ ------------
Warehouse interest income 13,361 47,005 48,526 127,225
Warehouse interest expense (9,280) (34,584) (32,491) (101,021)
------------ ------------ ------------ ------------
Net warehouse interest income 4,081 12,421 16,035 26,204
------------ ------------ ------------ ------------
Servicing fees 11,448 13,916 36,578 33,593
Other 5,590 3,892 20,410 20,467
------------ ------------ ------------ ------------
Total servicing fees and other 17,038 17,808 56,988 54,060
------------ ------------ ------------ ------------
Total revenues 26,857 83,833 110,400 265,007
------------ ------------ ------------ ------------
Expenses:
Compensation and benefits 18,061 29,677 71,158 91,537
Selling, general and administrative 28,228 28,384 77,705 84,193
Other interest expense 7,713 7,137 23,502 17,309
Interest expense-Greenwich Funds (Note 5) 9,105 -- 24,484 --
Market valuation adjustment (Note 6) 11,521 -- 74,397 --
Goodwill impairment charge (Note 7) 7,981 -- 85,427 --
Other charges (Note 7) 7,996 -- 13,175
Hedge loss -- 14,953 -- 14,953
------------ ------------ ------------ ------------
Total expenses 90,605 80,151 369,848 207,992
------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes (63,748) 3,682 (259,448) 57,015
Provision for income taxes 772 1,500 5,419 23,400
------------ ------------ ------------ ------------
Net income (loss) $ (64,520) $ 2,182 $ (264,867) $ 33,615
============ ============ ============ ============
Net income (loss) per common share:
Basic $ (1.91) $ 0.07 $ (7.81) $ 1.09
============ ============ ============ ============
Diluted $ (1.91) $ 0.06 $ (7.81) $ 0.93
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 34,201,380 31,518,348 34,208,085 30,792,266
Diluted 34,201,380 39,076,250 34,208,085 36,057,131
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
2
<PAGE> 5
IMC MORTGAGE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(264,867) $ 33,615
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Goodwill impairment charge 85,427 --
Interest expense - Greenwich Funds 5,500 --
Depreciation and amortization 19,931 18,386
Deferred taxes -- 20,667
Mortgage servicing rights -- (36,561)
Net loss on joint venture 117 1,971
Net loss on sale of joint venture 2,592 --
Net loss on disposal of Rhode Island branch 2,587 --
Net loss on disposal of subsidiaries 8,309 --
Net change in operating assets and liabilities:
Decrease in mortgages loans held for sale, net 431,873 73,694
Increase in securities purchased under agreements
to resell and securities sold but not yet purchased -- (2,738)
Decrease in accrued interest receivable 3,437 6,988
Decrease (increase) in interest-only and residual certificates 154,708 (305,158)
Decrease (increase) in other assets 1,064 (1,538)
Increase in accounts receivable (18,472) (13,075)
Decrease in income tax receivable 5,113 --
Increase in accrued interest payable 6,675 3,316
Decrease in accounts payable and accrued liabilities 504 13,701
--------- ---------
Net cash provided by (used in) operating activities 444,498 (186,732)
--------- ---------
Investing activities:
Investment in joint venture (638) (3,016)
Purchase of property, furniture, fixtures, and equipment (1,835) (5,228)
Other 166 (683)
--------- ---------
Net cash used in investing activities (2,307) (8,927)
--------- ---------
Financing activities:
Issuance of common stock -- 12
Issuance of preferred stock -- 49,082
Net decrease in warehouse finance facilities (416,123) (129,180)
Term debt and notes payable borrowings 214,340 375,312
Term debt and notes payable repayments (236,654) (112,949)
--------- ---------
Net cash provided by (used in) financing activities (438,437) 182,277
--------- ---------
Net increase (decrease) in cash and cash equivalents 3,754 (13,382)
Cash and cash equivalents, beginning of period 15,454 26,750
--------- ---------
Cash and cash equivalents, end of period $ 19,208 $ 13,368
========= =========
Supplemental disclosure cash flow information:
Cash paid during the period for interest $ 68,302 $ 115,015
========= =========
Cash paid during the period for taxes $ 404 $ 293
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE> 6
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION:
IMC Mortgage Company and its wholly-owned subsidiaries (the "Company" or
"IMC") through November 15, 1999 purchased and originated mortgage loans
made to borrowers who may not otherwise qualify for conventional loans
for the purpose of securitization and sale (see Note 9, "Events
Subsequent to September 30, 1999"). The Company typically securitized
these mortgages into the form of a Real Estate Mortgage Investment
Conduit ("REMIC") or an owner trust. The mortgages are sold on a
servicing retained (whereby the Company keeps the contractual right to
service the mortgage) or a servicing released basis.
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All intercompany
transactions have been eliminated in the accompanying consolidated
financial statements.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the interim periods are not necessarily
indicative of financial results for the full year. These unaudited
condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 and Current Reports on Forms 8-K dated July 22,
1999, May 27, 1999, March 3, 1999, February 26, 1999, February 23, 1999,
November 27, 1998 and October 21, 1998. The year-end balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
Certain reclassifications have been made to the presentations to conform
to current period presentations.
2. SALE OF CERTAIN ASSETS TO CITIFINANCIAL MORTGAGE AND TERMINATION OF
STOCK PURCHASE AGREEMENT WITH THE GREENWICH FUNDS
As described in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, the Company, like several companies in the
subprime mortgage industry, has been materially and adversely affected by
significant and adverse conditions in the equity, debt and asset-backed
capital markets. IMC's ability to access equity, debt and asset-backed
capital markets has become severely restricted. These market conditions
resulted in several other companies in the subprime mortgage industry
filing for bankruptcy protection, such as Southern Pacific Funding
(October 1, 1998), Wilshire Financial
4
<PAGE> 7
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
Services Group, Inc. (March 3, 1999), MCA Financial Corp. (February 11,
1999), United Companies (March 2, 1999), and certain subsidiaries of
First Plus Financial (March 6, 1999).
The Company's revolving credit facility with BankBoston, N.A. matured in
mid-October 1998 and BankBoston was unwilling to extend the facility. In
addition, beginning in September 1998, the Company's residual lenders,
which had advanced approximately $276 million to the Company
collateralized by its interest-only and residual certificates, proposed
to reduce their exposure by making cash margin calls. Certain of the
Company's warehouse lenders holding more than $2 billion in mortgage
loans also threatened to make margin calls on their credit lines during
September and October 1998. During this period, the Company's traditional
strategy of minimizing the risks of interest rate fluctuations through a
program of short selling United States Treasury securities subjected the
Company to margin calls of approximately $47.5 million in cash as a
"flight to quality" following the devaluation of the Russian ruble and
concerns over economic conditions in the emerging markets generally
disrupted the Company's anticipated hedging strategy.
As a consequence, in October 1998, the Company, faced with the prospect
of a forced liquidation of its assets or bankruptcy and the absence of
other alternative sources of capital, entered into a $33 million standby
revolving credit facility with Greenwich Street Capital Partners II, L.P.
and certain of its affiliates (the "Greenwich Funds"). The facility
provided IMC with interim financing for a period of 90 days, which
enabled the Company to continue to operate while it sought a substantial
source of capital which would either invest funds in the Company or
acquire the Company. In return for providing the facility, the Greenwich
Funds received a $3.3 million commitment fee and non-voting Class C
exchangeable preferred stock representing, in value, the equivalent of
40% of the common equity of the Company. The Class C exchangeable
preferred stock is exchangeable for Class D preferred stock, which has
voting rights equivalent to 40% of the voting power of the Company. Under
the loan facility, the Greenwich Funds may exchange the loans for
additional shares of Class C exchangeable preferred stock or shares of
Class D preferred stock in an amount representing, in value, up to the
equivalent of 50% of the common equity of the Company (in addition to the
preferred stock received for providing the facility) (the "Exchange
Option"). In addition, upon certain changes in control of the Company,
the Greenwich Funds could elect either to (i) receive payment of the
facility, plus accrued interest, and a take-out premium of up to 200% of
the average principal amount of the loans outstanding, or (ii) exercise
the Exchange Option. The Company and the Greenwich Funds also entered
into intercreditor agreements with the Company's significant creditors
requiring such creditors to "standstill" for up to 90 days.
On February 19, 1999, the Company entered into a merger agreement with
the Greenwich Funds. On March 31, 1999, the merger agreement was
terminated and recast as an acquisition agreement (the "Acquisition
Agreement") with the Greenwich Funds on
5
<PAGE> 8
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
substantially the same economic terms. The Company's execution and
delivery of the merger agreement and the Acquisition Agreement were
unanimously approved by the Board of Directors of the Company, acting on
the unanimous recommendation of a special committee of the Board
consisting solely of disinterested directors. Under the Acquisition
Agreement, the Company agreed to issue common stock to the Greenwich
Funds representing approximately 93.5% of the outstanding common stock
following such issuance. In return for such common stock issuance, the
Greenwich Funds agreed to surrender their Class C exchangeable preferred
stock and amend the loan agreement to (i) provide for an additional $35
million of working capital loans to the Company, (ii) forego the Exchange
Option, (iii) reduce the takeout premium payable in certain events from
200% of the average principal amount outstanding from October 1998 to the
prepayment date, to 10% of the average principal amount outstanding from
the closing of the acquisition to the prepayment date, and (iv) extend
the maturity of the loans thereunder until the third anniversary of the
acquisition. The Company also entered into amended intercreditor
agreements with certain of its creditors in February 1999 which provided
an additional standstill period through the consummation of the
transaction with the Greenwich Funds and for 12 months thereafter,
provided the acquisition occurred within five months, and subject to
earlier termination in certain events as provided in the intercreditor
agreements.
On July 14, 1999, the Company entered into an Agreement (the "Agreement")
to sell certain assets to CitiFinancial Mortgage Company ("CitiFinancial
Mortgage"), an indirectly wholly-owned subsidiary of Citigroup Inc. The
Agreement was approved by the Company's Board of Directors on July 30,
1999 and, as a result, the Acquisition Agreement with the Greenwich Funds
terminated. Consequently, the Greenwich Funds is not obligated to provide
an additional $35 million of loans to the Company.
As discussed in Note 9 "Events Subsequent to September 30, 1999", on
November 12, 1999, the shareholders of the Company approved the Agreement
with CitiFinancial Mortgage. Simultaneously, the Company, the Significant
Lenders and the Greenwich Funds entered into second amended and restated
intercreditor agreements. Under these agreements, the Lenders agreed to
keep their respective facilities in place so long as the obligations owed
to those lenders are repaid according to an agreed-upon plan, as
described in the agreements.
On November 15, 1999 the Company received $96 million from CitiFinancial
Mortgage for the sale of its mortgage servicing rights related to
mortgage loans which have been securitized, real property consisting of
the Company's Tampa, Florida headquarters building and the Company's
leased facilities at its Ft. Washington, Pennsylvania, Cherry Hill, New
Jersey and Cincinnati, Ohio office locations. Additionally, all
furniture, fixtures and equipment and other personal property located at
the premises described above were included in the purchase. Substantially
all of the employees at the locations referred to
6
<PAGE> 9
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
above were offered employment by CitiFinancial Mortgage. Under the terms
of the Agreement, the Company will receive an additional $4 million of
sales proceeds over the next two years from CitiFinancial Mortgage for
this sale if certain conditions are met.
In addition to the purchase price of $100 million, CitiFinancial Mortgage
reimbursed the Company for servicing advances made by the Company in its
capacity as servicer. As servicer of these loans, the Company was required
to advance certain interest and escrow amounts to the securitization
trusts for delinquent mortgagors and to pay expenses related to
foreclosure activities. The Company then collected the amounts from the
mortgagors or from the proceeds from liquidation of foreclosed properties.
The servicing advances at September 30, 1999 consisting of $34.8 million
made to pay escrow and foreclosure servicing advances and $24.1 million
made for delinquent interest servicing advances were recorded as accounts
receivable on the Company financial statements. The amounts owed to the
Company for reimbursement of servicing advances made in connection with
escrows and foreclosure approximated $42.6 million at November 15, 1999,
and amounts owed to the Company for reimbursement of servicing advances
made in connection with delinquent loans were $9.8 million at November 15,
1999. The escrow and foreclosure servicing advances, which are typically
recovered by the servicer of loans over a period of up to two years, were
acquired by CitiFinancial Mortgage at a discount of 10.45%. The delinquent
interest servicing advances, which are typically repaid to the servicer of
loans monthly, were acquired by CitiFinancial Mortgage at a discount of
$3.0 million.
The proceeds from the sale of assets were used to repay certain
indebtedness of approximately $68.3 million secured by certain assets of
the Company upon the consummation of the sale of assets to CitiFinancial
Mortgage and provide working capital.
After the sale of assets to CitiFinancial Mortgage and the disposition of
its remaining subsidiaries, the Company will essentially have no ongoing
operating business, but will continue to own assets consisting primarily
of cash, accounts receivable, mortgage loans held for sale, interest-only
and residual certificates and other assets that are pledged as collateral
for the warehouse finance facilities and term debt. The assets remaining
after the sale of assets to CitiFinancial Mortgage will be either held or
sold by the Company to attempt to realize the maximum value for these
assets and repay its obligations, including the warehouse finance
facilities and term debt. If the Company receives sufficient proceeds
from these remaining assets to repay its obligations, both secured and
unsecured, any remaining proceeds will be used first to redeem the
Company's outstanding preferred stock and then to make payments to the
Company's common shareholders. The Company does not expect any payment to
be made to its common shareholders upon the consummation of the sale of
assets to CitiFinancial Mortgage, and the Company believes that any
payment to its shareholders in the future is unlikely but will ultimately
depend upon the proceeds received from the assets remaining after
consummation of the CitiFinancial Mortgage transaction. If any proceeds
remain for the Company's common shareholders, these proceeds would be
available only after the repayment of the Company's obligations and the
redemption of the Company's preferred stock. The redemption of preferred
stock, if made, is not expected for several years. There can be no
assurance that the Company will be able to maximize the value of its
remaining assets and have adequate proceeds and resources to satisfy its
creditors and provide any value to the Company's common shareholders or
that the Company will not seek bankruptcy protection in the future.
3. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), which was
amended by SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133".
SFAS 133 is effective, as amended, for fiscal quarters of fiscal years
beginning after June 15, 2000 (January 1, 2001 for the Company). SFAS 133
requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending
on whether a derivative was designated as part of a hedge transaction and,
if it was, the type of hedge transaction. For fair-value hedge
transactions in which the Company hedges changes in the fair value of an
asset, liability or
7
<PAGE> 10
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
firm commitment, changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in the hedged
item's fair value. The ineffective portion of hedges will be recognized
in current-period earnings.
SFAS 133 precludes designation of a nonderivative financial instrument as
a hedge of an asset or liability. The Company, prior to September 30,
1998 hedged its interest rate risk on loan purchases by selling short
United States Treasury Securities which match the duration of the fixed
rate mortgage loans held for sale and borrowing the securities under
agreements to resell. Prior to September 30, 1998 the unrealized gain or
loss resulting from the change in fair value of these instruments was
deferred and recognized upon securitization as an adjustment to the
carrying value of the hedged mortgage loans. SFAS 133 requires the gain
or loss on these nonderivative financial instruments to be recognized in
earnings in the period of changes in fair value without a corresponding
adjustment of the carrying amount of mortgage loans held for sale. While
the Company has no present plans to engage in hedging activities,
management anticipates that if the Company uses derivative financial
instruments to hedge the Company's interest rate risk on future loan
purchases the Company will use derivative financial instruments which
qualify for hedge accounting under the provisions of SFAS 133.
The actual effect that implementation of SFAS 133 will have on the
Company's statements will depend on various factors determined at the
period of adoption, including whether the Company is hedging its interest
rate risk on loan purchases, the type of financial instrument used to
hedge the Company's interest rate risk on loan purchases, whether such
instruments qualify for hedge accounting treatment, the effectiveness of
the hedging instrument, the amount of mortgage loans held for sale which
the Company intends to hedge, and the level of interest rates.
Accordingly, the Company can not determine at the present time the impact
that adoption of SFAS 133 will have on its statements of operations or
balance sheets.
Effective January 1, 1999, the Company adopted SFAS No. 134, "Accounting
for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS
134"). SFAS 134 amends SFAS No. 65, "Accounting for Certain
Mortgage-Backed Securities" ("SFAS 65") to require that after an entity
that is engaged in mortgage banking activities has securitized mortgage
loans that are held for sale, it must classify the resulting retained
mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. However, a mortgage
banking enterprise must classify as trading any retained mortgage-backed
securities that it commits to sell before or during the securitization
process. Previously, SFAS 65 required that after an entity that is
engaged in mortgage banking activities has securitized a mortgage loan
that is held for sale, it must classify the resulting retained
mortgage-backed securities or other retained interests as trading,
regardless of the entity's intent to sell or hold the securities or
retained interest.
8
<PAGE> 11
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
The application of the provisions of SFAS 134 did not have an impact on
the Company's financial position or results of operations.
4. EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128 "Earnings per Share" ("SFAS 128"), which became effective for the
Company for reporting periods ending after December 15, 1997. Under the
provisions of SFAS 128, basic earnings per share is determined by
dividing net income (loss), adjusted for preferred stock dividends, by
weighted average shares outstanding. Diluted earnings per share, as
defined by SFAS No. 128, is computed assuming all dilutive potential
common shares were issued.
Amounts used in the determination of basic and diluted earnings per share
are shown in the table below:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------ ----------- ------------ ------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Net income (loss) ............................. $ (64,520) $ 2,182 $ (264,867) $ 33,615
Less accretion of preferred stocks ............ (737) -- (2,211) --
------------ ----------- ------------ ------------
Income (loss) available to common stockholders-
basic .................................. $ (65,257) $ 2,182 $ (267,078) $ 33,615
============ =========== ============ ============
Weighted average common shares outstanding .... 34,201,380 31,518,348 34,208,085 30,792,266
Adjustments for dilutive securities:
Stock warrants .......................... -- 1,479,130 -- 1,930,547
Stock options ........................... -- 1,114,813 -- 1,073,830
Redeemable preferred stock .............. 4,060,470 -- 1,368,363
Contingent shares ....................... -- 903,489 -- 892,125
------------ ----------- ------------ ------------
Diluted common shares ......................... 34,201,380 39,076,250 34,208,085 36,057,131
============ =========== ============ ============
</TABLE>
For the three and nine months ended September 30, 1999, there were no
adjustments for stock warrants, stock options and contingent shares in
computing the diluted weighted average number of shares outstanding as
their effect was antidilutive.
5. WAREHOUSE FINANCE FACILITIES, TERM DEBT AND NOTES PAYABLE:
WAREHOUSE FINANCE FACILITIES
In October 1998, as a result of volatility in equity, debt and
asset-backed markets, among other things, the Company entered into
intercreditor agreements with Paine Webber Real Estate Securities, Inc.
("Paine Webber"), Bear Stearns Home Equity Trust 1996-1 ("Bear
9
<PAGE> 12
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
Stearns"), and Aspen Funding Corp. and German American Capital
Corporation, subsidiaries of Deutsche Bank of North America Holding Corp
("DMG") (collectively, the "Significant Lenders"). The intercreditor
agreements provided for the Significant Lenders to "standstill" and keep
outstanding balances under their facilities in place, subject to certain
conditions, for up to 90 days (which expired mid-January 1999) to allow
for the Company to explore its financial alternatives. The intercreditor
agreements also provided, subject to certain conditions, that the lenders
would not issue any margin calls requesting additional collateral be
delivered to the lenders. To induce DMG to enter the intercreditor
agreement, the Company was required to permit DMG's committed warehouse
and interest-only and residual credit facilities to become uncommitted
and issued to DMG warrants exercisable at $1.72 per share to purchase
2.5% of the common stock of the Company on a diluted basis.
In mid-January 1999, the intercreditor agreements expired; however, on
February 19, 1999, concurrent with the execution of the Acquisition
Agreement discussed in Note 1 "Organization and Basis of Presentation"
(see the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and Note 17 of Notes to Consolidated Financial
Statements "Significant Events and Events Subsequent to December 31,
1998" included therein), the Company entered into amended and restated
intercreditor agreements with the Significant Lenders. Under the amended
and restated intercreditor agreements, the Significant Lenders agreed to
keep their respective facilities in place until the closing of the
acquisition and for 12 months thereafter provided that the closing of the
acquisition occurred within five months, subject to earlier termination
in certain events. The intercreditor agreements also required the Company
to make various amortization payments on the underlying debt.
The amended and restated intercreditor agreements had been extended
through November 16, 1999, subject to earlier termination in certain
events. As discussed in Note 9 "Events Subsequent to September 30, 1999,"
on November 12, 1999 the Company, the Significant Lenders, and the
Greenwich Funds entered into second amended and restated intercreditor
agreements. Under those agreements, the lenders agreed to keep their
respective facilities in place so long as the obligations owed to these
lenders are repaid according to an agreed-upon plan, as described in the
agreements.
None of the three Significant Lenders have formally reduced the amount
available under its uncommitted facilities, but each has indicated that
it will not make any additional advances under their facilities after
November 15, 1999.
At September 30, 1999, the Company had a $1.25 billion uncommitted credit
facility with Paine Webber. Outstanding warehouse borrowings, which bear
interest at rates ranging from LIBOR (5.4% at September 30, 1999) plus
0.75% to LIBOR plus 2.00%, were approximately $55.4 million under this
facility at September 30, 1999. The Company prior
10
<PAGE> 13
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
to November 15, 1999 had informally requested that Paine Webber permit
funding of an additional $200 million under its warehouse facilities, but
was notified that Paine Webber did not intend to make any additional
advances.
At September 30, 1999, the Company had a $1.0 billion uncommitted credit
facility with DMG which included a $100.0 million credit facility
collateralized by interest-only and residual certificates. At September
30, 1999, approximately $129.9 million was outstanding for warehousing of
mortgage loans under this facility. DMG, prior to November 15, 1999, had
indicated to the Company that it did not intend to make any additional
advances and any funding will be on an "as-requested" basis.
At September 30, 1999, the Company had a $1.0 billion uncommitted
warehouse facility with Bear Stearns. This facility bears interest at
LIBOR plus 0.75%. At September 30, 1999, approximately $348.3 million was
outstanding under this facility. Bear Stearns, prior to November 15,
1999, had requested that the Company maintain outstanding amounts under
this warehouse facility at no more than $500 million.
At September 30, 1999, the Company had an expired warehouse facility with
Residential Funding Corporation ("RFC") which bears interest at LIBOR
plus 1.25%. At September 30, 1999, approximately $29.9 million was
outstanding under this facility, which expired on August 31, 1999. The
RFC credit facility requires the Company to comply with various financial
covenants, including, among other things, minimum net worth tests and a
minimum pledged servicing portfolio. At September 30, 1999, the Company's
net worth, tangible net worth and pledged servicing portfolio were below
the minimum requirements under the covenants of the RFC credit facility.
The Company is in the process of selling the loans which collateralize
the warehouse facility and repaying the amount outstanding under the RFC
credit facility.
Additionally, at September 30, 1999, approximately $4.9 million was
outstanding under another warehouse line of credit, which bears interest
at LIBOR plus 1.5% and has expired and is not expected to be renewed.
Outstanding borrowings under the Company's warehouse financing facilities
are collateralized by mortgage loans held for sale and servicing rights
on approximately $210 million of mortgage loans. Upon the sale of these
loans, proceeds are used to repay the borrowings under these lines.
The Company prior to November 15, 1999 had attempted to enter into
arrangements to obtain warehouse facilities from lenders that were not
currently providing warehouse facilities to the Company, but was not
successful.
11
<PAGE> 14
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
TERM DEBT
At September 30, 1999, outstanding interest-only and residual financing
borrowings were $128.3 million under the Company's credit facility with
Paine Webber. Outstanding borrowings bear interest at LIBOR plus 2.0% and
are collateralized by the Company's interest in certain interest-only and
residual certificates.
Bear, Stearns & Co. Inc. and its affiliates, Bear Stearns Mortgage
Capital Corporation and Bear, Stearns International Limited, provided the
Company with an $100 million credit facility which is collateralized by
the Company's interest in certain interest-only and residual
certificates. At September 30, 1999, $76.6 million was outstanding under
this credit facility, which bears interest at 1.75% per annum in excess
of LIBOR.
At September 30, 1999, outstanding interest-only and residual financing
borrowings under the Company's credit facility with DMG were $37.0
million. Outstanding borrowings bear interest at LIBOR plus 2.0% and are
collateralized by the Company's interest in certain interest-only and
residual certificates.
The interest-only and residual financing facilities described above are
subject to the second amended and restated intercreditor agreements
described under "Warehouse Finance Facilities" above.
At September 30,1999, the Company had outstanding $1.8 million under an
agreement with Nomura Securities (Bermuda) Ltd. which matured in August
1998, bears interest at 2.0% per annum in excess of LIBOR and is
collateralized by the Company's interest in certain interest-only and
residual certificates. The cash flow realized by the Company from the
interest in certain interest-only and residual certificates
collateralizing the $1.8 million borrowed is being used to repay the
amounts owed.
At September 30, 1999, the Company also had outstanding a $4.8 million
credit facility with a financial institution which bears interest at 10%
per annum. The credit facility provides for repayment of principal and
interest over 36 months, through October 2001.
At September 30, 1999, the Company had outstanding a $5 million credit
facility with a financial institution which bears interest at 6% per
annum. The credit facility matures in February 2000 and is collateralized
by cash and cash equivalents.
BankBoston provided the Company with a revolving credit facility which
matured in October 1998, bore interest at LIBOR plus 2.75% and provided
for borrowings up to $50.0 million to be used to finance interest-only
and residual certificates or for acquisitions or bridge financing.
BankBoston, with participation from another financial institution, also
provided the Company with a $45.0 million working capital facility, which
bore interest at
12
<PAGE> 15
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
LIBOR plus 2.75% and matured in October 1998. After maturity, the
interest rate on these facilities increased to prime (8.25% at September
30, 1999) plus 2% per annum.
The Company was unable to repay either of these BankBoston facilities
when they matured and in October 1998 the Company entered into a
forbearance and intercreditor agreement with BankBoston with respect to
its combined $95.0 million facilities. That agreement provided that the
bank would take no collection action, subject to certain conditions, for
up to 90 days (which expired in mid-January 1999) to allow the Company to
explore its financial alternatives.
In mid-January, 1999 the forbearance and intercreditor agreement with
BankBoston expired. On February 19, 1999 the Greenwich Funds purchased,
at a discount, from BankBoston its interest in the credit facilities and
entered into an amended intercreditor agreement with the Company relating
to the combined $95.0 million facilities. On February 19, 1999, $87.5
million was outstanding under the combined facilities. At September 30,
1999, $86.0 million was outstanding under the combined facilities.
As discussed in Note 9 "Events Subsequent to September 30, 1999," on
November 12, 1999 the Company's shareholders approved the Agreement with
CitiFinancial Mortgage. Simultaneously, the Company, the Significant
Lenders and the Greenwich Funds entered into second amended and restated
intercreditor agreements. Under those agreements, the lenders agreed to
keep their respective facilities in place so long as the obligations owed
to these lenders are repaid according to an agreed-upon plan, as
described in the agreements.
On October 15, 1998, the Company entered into an agreement for a $33.0
million standby revolving credit facility with certain of the Greenwich
Funds (the "Greenwich Loan Agreement"). The facility was available to
provide working capital for a period of up to 90 days and bore interest
at 10% per annum. After 90 days, the interest rate on the facility
increased to 12% per annum on amounts outstanding after 90 days. The
terms of the facility resulted in substantial dilution of existing common
stockholders' equity equal to a minimum of 40%, up to a maximum of 90%,
on a diluted basis, depending on (among other things) when, or whether
the Company entered into a definitive agreement for a transaction which
could result in a change of control. In mid-January 1999, the $33.0
million standby revolving credit facility matured. On February 16, 1999,
the Greenwich Funds made additional loans totaling $5.0 million available
under the facility. On May 18, 1999, the interest rate on the facility
was increased to 22% per annum on amounts outstanding after May 18, 1999.
At September 30, 1999, $38.0 million was outstanding under the Greenwich
Loan Agreement.
The Company is required to advance monthly delinquent interest as the
servicer under the pooling and servicing agreements related to
securitizations the Company services. The Company typically makes these
advances to the securitizations on or about the 18th of each
13
<PAGE> 16
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
month and such advances are typically repaid by the securitizations over
a 30-day period.
In this respect, on April 19, 1999, the Company borrowed $15 million from
the Greenwich Funds pursuant to secured promissory notes to fund a
portion of delinquent interest advance to the securitizations. These
notes bore interest at a rate of 20% per annum. These notes have been
repaid in full.
On May 18, 1999, the Company entered into a Note Purchase and Amendment
Agreement (the "Note Purchase Agreement") with the Greenwich Funds to
provide the Company access to short-term financing to enable the Company
to continue to make the required monthly delinquent interest advances.
Borrowings under the Note Purchase Agreement bear interest at 20% per
annum. On May 18, 1999, the Greenwich Funds loaned the Company an
aggregate of $33.0 million under the Note Purchase Agreement to fund a
portion of the delinquent interest advance to the securitizations. In
consideration for these loans, the Company paid the Greenwich Funds a
$1.2 million commitment fee. The $33.0 million borrowed under the Note
Purchase Agreement has been repaid in full.
On June 18, 1999, the Greenwich Funds loaned the Company an aggregate of
$35.0 million under the Note Purchase Agreement to fund a portion of the
delinquent interest advance to the securitizations. In consideration for
these loans, the Company paid Greenwich Funds a $1.0 million commitment
fee. The $35.0 million borrowed under the Note Purchase Agreement has
been repaid in full.
On July 16, 1999, the Company borrowed $45.0 million under the Note
Purchase Agreement to fund a portion of the delinquent interest advance
to the securitizations. In consideration for these loans, the Company
paid the Greenwich Funds a $1.25 million commitment fee. The $45.0
million borrowed under the Note Purchase Agreement has been repaid in
full.
On August 18, 1999, the Company borrowed $45.0 million under the Note
Purchase Agreement to fund a portion of the delinquent interest advance
to the securitizations. In consideration for these loans, the Company
paid the Greenwich Funds a $1.25 million commitment fee. The $45.0
million borrowed under the Note Purchase Agreement has been repaid in
full.
On September 17, 1999, the Company borrowed $45.0 million under the Note
Purchase Agreement to fund a portion of the delinquent interest advance
to the securitizations. In consideration for their loans, the Company
paid the Greenwich Funds a $1.25 million commitment fee. At September 30,
1999, $21.4 was outstanding under the note purchase agreement. The $45.0
million borrowed under the Note Purchase Agreement has been repaid in
full.
On October 18, 1999, the Company borrowed $60.0 million under the Note
Purchase Agreement to fund a portion of the delinquent interest advance
to the securitizations. In consideration for their loans, the Company
paid the Greenwich Funds a $1.50 million
14
<PAGE> 17
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
commitment fee. The $60.0 million borrowed under the Note Purchase
Agreement has been repaid in full.
As discussed in Note 9 "Events Subsequent to September 30, 1999," on
November 15, 1999, the Company sold its mortgage servicing rights related
to the mortgage loans which have been securitized. Accordingly, subsequent
to November 15, 1999, the Company will no longer be required to advance
monthly delinquent interest as the servicer under the pooling and
servicing agreements related to the mortgage loans which have been
securitized.
Interest expense - Greenwich Funds of $9.1 and $24.5 million included in
the accompanying Consolidated Statement of Operations for the three and
nine months ended September 30, 1999 consists of interest charges and
amortization of commitment fees with respect to the Greenwich Loan
Agreement, the Note Purchase Agreement, the $95.0 million credit
facilities that the Greenwich Funds purchased from Bank Boston on February
19, 1999, as well as amortization of the value attributable to the Class C
preferred stock issued and the additional preferred stock issuable to the
Greenwich Funds in exchange for its loan under the terms of the agreement.
(See the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and Note 4 of Notes to Consolidated Financial Statements
"Redeemable Preferred Stock" included therein).
The warehouse notes and term debt have requirements that the Company
maintain certain debt to equity ratios and certain agreements restrict the
Company's ability to pay dividends on common stock. Capital expenditures
are limited by certain agreements. At September 30, 1999, the Company was
not in compliance with certain financial covenants related to credit
facilities with the Significant Lenders.
As discussed in Note 9 "Events Subsequent to September 30, 1999," on
November 12, 1999 the Company's shareholders approved the Agreements with
CitiFinancial Mortgage. Simultaneously, the Company, the Significant
Lenders and the Greenwich Funds entered into second amended and restated
intercreditor agreements. Under those agreements, the lenders agreed to
keep their respective facilities in place as the Company repays the
obligations owed to these lenders according to an agreed-upon plan.
NOTES PAYABLE
At September 30, 1999, $4.1 million was outstanding under a mortgage note
payable, which bears interest at 8.16% per annum and expires December
2007. The note is collateralized by the Company's headquarters building.
On November 15, 1999, in conjunction with the sale of certain assets to
CitiFinancial, CitiFinancial assumed the amount outstanding under the
mortgage note payable.
At September 30, 1999, $12.9 million was outstanding under notes payable
to shareholders
15
<PAGE> 18
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
related to an acquisition completed in 1997. These notes bear interest at
prime plus 2.0% per annum and matured on July 10, 1999. After maturity,
the unpaid principal balance accrues interest until paid in full at prime
plus 5% per annum. On November 11, 1999, the Company and certain other
parties entered into an intercreditor agreement with the shareholders
holding such notes. Under that agreement, the holders of those notes
agreed to forebear any collection actions so long as the Company repays
the obligations owed to these lenders according to an agreed-upon plan and
no event of default occurs.
6. INTEREST-ONLY AND RESIDUAL CERTIFICATES
Activity in interest-only and residual certificates consisted of the
following:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Beginning balance ..................................... $ 352,544 $ 445,577 $ 468,841 $ 223,306
Additions ............................................. -- 133,022 -- 357,142
Cash receipts ......................................... (26,890) (50,135) (80,311) (51,984)
Market valuation adjustment ........................... (11,521) -- (74,397) --
--------- --------- --------- ---------
Balance, September 30 ................................. $ 314,133 $ 528,464 $ 314,133 $ 528,464
========= ========= ========= =========
</TABLE>
Market valuation adjustment represents the realized loss on the Company's
interest-only and residual certificates. During the second quarter of
1999, as a result of trends in the Company's serviced loan portfolio and
adverse market conditions, as described in Note 2 "Sale of Certain Assets
and Termination of Stock Purchase Agreement with the Greenwich Funds", the
Company revised its loss curve assumption used to approximate the timing
of losses over the life of the securitized loans so that expected losses
from defaults gradually increase from zero in the first six months of the
loan to 275 basis points after 30 months, representing estimated aggregate
losses over the life of the pool (i.e., historical plus future losses) of
approximately 4.3% of original pool balances. Prior to the second quarter
of 1999, the Company expected losses from defaults to gradually increase
from zero in the first six months of the loan to 175 basis points after 36
months.
The Company believes the adverse market conditions affecting the
non-conforming mortgage industry may limit the Company's borrowers'
ability to refinance existing delinquent loans serviced by IMC with other
non-conforming mortgage lenders that traditionally had offered loans to
borrowers that are less creditworthy, which IMC believes may increase the
frequency of defaults. There can be no assurance that the loss curve
assumption presently being used by the Company, based on the adverse
market conditions, will prove to be sufficient. The revised loss curve
assumption resulted in a decrease to the estimated fair value of the
interest-only and residual certificates of approximately $62.9 million
for the six months ended June 30, 1999, which is included in the market
valuation adjustment of $74.4 million in the accompanying Consolidated
Statements of Operations for the nine months ended September 30, 1999.
16
<PAGE> 19
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
Prior to the fourth quarter of 1998, the Company discounted the present
value of projected cash flows retained by the Company at discount rates
ranging from 11% to 14.5%. During the fourth quarter of 1998, as a result
of adverse market conditions, the Company adjusted to 16% the discount
rate used to present value the projected cash flow retained by the
Company.
7. DISPOSAL OF ASSETS:
Goodwill Impairment and Loss on Disposal of Subsidiaries
In June 1999, CitiFinancial Mortgage submitted a non-binding letter of
intent to the Company to purchase the Company's mortgage loan servicing
business and substantially all of its correspondent origination loan
business and a portion of its broker originated loan business. The
non-binding letter of intent did not include the Company's eight operating
subsidiaries, which produced the remaining broker originated loan business
as well as direct originations. The Board of Directors met on June 14,
July 2 and July 8, 1999 to discuss a transaction with CitiFinancial
Mortgage and to consider other alternatives. The Company and CitiFinancial
Mortgage negotiated the terms of an agreement until July 14, 1999 when the
Company and CitiFinancial Mortgage entered into the Agreement, as
described in Note 2, which did not include the Company's eight operating
subsidiaries. Thereafter, on July 26, 1999, the Company's Board of
Directors approved a formal plan to dispose of the eight subsidiaries. The
Company recorded a goodwill impairment charges of $77.4 million during the
second quarter of 1999 and $8.0 million during the third quarter of 1999
relating to the formal plan to dispose of the eight operating
subsidiaries. Additional charges incurred or accrued relating to, among
other things, disposal of assets and costs of disposal are included in
other charges in the accompanying Statements of Operations for the three
and nine months ended September 30, 1999. The actual amount of the
additional charges accrued will depend on the proceeds, if any, from
disposal and the costs incurred to dispose of the remaining subsidiaries.
At September 30, 1999, the Company had substantially completed the
disposal of six of the eight operating activities. All long-lived assets
of the remaining subsidiaries are reported at the lower of carrying value
or fair value less cost to sell in the accompanying Consolidated Balance
Sheet at September 30, 1999.
The Company reviews the potential impairment of goodwill on a
non-discounted cash flow basis to assess recoverability. The cash flows
are projected on a pre-tax basis over the estimated useful lives assigned
to goodwill. The Board of Directors' approval, on July 26, 1999, of a
formal plan to dispose of the eight operating facilities, as described
above, led the Company to determine that the useful lives assigned to
goodwill should be reduced to less than one year. The resulting evaluation
of the goodwill associated with the eight operating subsidiaries resulted
in a goodwill impairment charges of $77.4 million during the second
quarter of 1999 and $8.0 million during the third quarter of 1999.
17
<PAGE> 20
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
Loss on Disposal of Investments in International Operations
In March 1996, the Company entered into an agreement to form a joint
venture (Preferred Mortgages Limited) in the United Kingdom to originate
and purchase mortgages made to borrowers who may not otherwise qualify for
conventional loans for the purpose of securitization and sale. Under the
agreement, the Company and a second party each owned 45% of the joint
venture, and a third party owned the remaining 10%. The Company's original
investment in the joint venture represented the acquisition of 675,000
shares of the joint venture's stock for $1.0 million and a note receivable
from the joint venture for $1.0 million. Subsequent to the original
investment, the Company made net advances to the joint venture and
recorded its pro-rata share of the losses from the joint venture. The
Company's net investment in the joint venture on June 30, 1999 was $4.1
million.
On June 30, 1999, the Company entered into an agreement to sell its
interest in the joint venture to one of its partners. Under the terms of
sale agreement, the Company received $1.5 million in exchange for its
interest in the joint venture, including all shares, notes receivable,
advances and interest due from the joint venture. The sale resulted in a
loss of approximately $2.6 million, which is included in other charges in
the accompanying Consolidated Statements of Operations for the nine months
ended September 30, 1999.
On August 12, 1999, the Company sold its Canadian subsidiary, IMC Canada
LTD, Inc. ("IMC Canada") to a third party. The net proceeds from the
disposition approximated the current carrying value of IMC Canada. The
financial position and results of operations of IMC Canada were not
material in relation to the financial position or results of operations of
the Company.
Loss on Disposal of Assets of Mortgage Central Corp.
On January 1, 1996, the Company acquired assets of Mortgage Central Corp.,
a Rhode Island corporation ("MCC"), a mortgage banking company which did
business under the name "Equitystars" primarily in Rhode Island, New York,
Connecticut and Massachusetts. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the purchase price of $2.0
million was allocated to the assets purchased and the liabilities assumed
based upon the fair values at the date of acquisition. The excess of the
purchase price of over the fair values of assets acquired and liabilities
assumed was recorded as goodwill.
On June 30, 1999, the Company terminated its operations at the MCC offices
in Rhode Island and began disposing of the related assets. Accordingly,
the carrying amount of the goodwill that arose from the acquisition of MCC
was eliminated. The loss on disposal of the assets of MCC of $2.6 million
is included in other charges in the accompanying Consolidated Statement of
Operations for the nine months ended September 30, 1999.
18
<PAGE> 21
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES
Certain members of management entered into employment agreements expiring
through 2001 which, among other things, provided for aggregate annual
compensation of approximately $1.4 million plus bonuses ranging from 5% to
15% of base salary in the relevant year for each one percent by which the
increase in net earnings per share of the Company over the prior year
exceeds 10%, up to a maximum of 300% of annual compensation. No bonuses
under these contracts were paid for the fiscal year 1998 and no bonuses
will be paid for the fiscal year 1999. Each employment agreement contained
a restrictive covenant, which prohibits the executive from competing with
the Company for a period of 18 months after termination, and certain
deferred compensation upon a "change of control" as defined in the
employment agreements. On July 14, 1999, the Company entered into an
Agreement to sell certain assets to CitiFinancial Mortgage. The Agreement
was contingent upon CitiFinancial Mortgage entering into future employment
arrangements with certain members of management acceptable to CitiFinancial
Mortgage.
Certain members of the Company's Board of Directors and certain members of
the Company's senior management had employment agreements with the Company,
and the Company's general counsel, a director of the Company, had a
retainer agreement with the Company, that permitted each of them, following
a change of control, to voluntarily terminate their employment with, or
retention by, the Company and become entitled to deferred compensation. The
members of senior management who have these agreements and the Company's
general counsel entered into mutual, general and irrevocable releases with
the Company, which released the Company from payment of deferred
compensation aggregating approximately $10 million and all other
obligations in the employment or retainer agreements in consideration for
aggregate payments of $400,000 plus additional aggregate payments of
$420,000 to be paid over a period of up to twelve months. The payments
commenced upon execution of the release for those members of senior
management who are not also directors and commenced upon consummation of
the Agreement with CitiFinancial Mortgage for members of the Company's
Board of Directors and general counsel. Each member of senior management
and the Company's general counsel who had entered into a release became
employed "at will" and could have been or can be terminated by the Company
at any time without additional benefits.
The Greenwich Funds have agreed to indemnify certain surety companies
against losses on surety bonds issued with respect to the Company. To
induce the Greenwich Funds to make this indemnity, on May 18, 1999 the
Company entered into a Reimbursement Agreement (the "Reimbursement
Agreement") with the Greenwich Funds. Under the Reimbursement Agreement,
the Company will reimburse the Greenwich Funds for any amounts it pays to
indemnify the surety companies. The Company will also pay interest on any
payments made by the Greenwich Funds to the surety companies at a rate
equal to the prime rate plus 2%.
19
<PAGE> 22
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
LEGAL PROCEEDINGS
The Company is party to various legal proceedings arising out of the
conduct of its business. The Company has accrued certain amounts to defend
various legal proceedings and such amounts are included in accrued
liabilities in the accompanying Consolidated Balance Sheet at September 30,
1999. Management believes that amounts accrued for defense in connection
with these matters are adequate and ultimate resolution of these matters
will not have a material adverse effect on the consolidated financial
condition or results of operations of the Company.
On December 23, 1998, seven former shareholders of Corewest sued the
Company in Superior Court of the State of California for the County of Los
Angeles claiming the Company agreed to pay them $23.8 million in
cancellation of the contingent "earn out" payment, if any, payable by the
Company in connection with the Company's purchase of all of the outstanding
shares of Corewest. In addition, several former shareholders of Corewest
alleged certain aspects of employment agreements with the Company were
breached. The former shareholders of Corewest settled their employment
agreement claims and agreed to dismiss their claims under that lawsuit and
signed mutual, general and irrevocable releases for approximately $1.5
million. The settlement was paid upon consummation of the Agreement with
CitiFinancial Mortgage on November 15, 1999. The $1.5 million settlement
cost is included in selling general and administrative expenses in the
accompanying Consolidated Statements of Operations for the three and nine
months ended September 30, 1999.
On June 17, 1999, the former shareholders of Central Money Mortgage Co.,
Inc. ("Central Money Mortgage") sued the Company and its general counsel in
U.S. District Court for the State of Maryland claiming failure to perform
on certain oral and written representations made in connection with the
Company's acquisition of the assets of Central Money Mortgage. The case is
in the preliminary stages of discovery; however, based on consultation with
legal counsel, the Company's management believes there is little merit in
the plaintiffs' claims and intends to defend such action vigorously.
9. EVENTS SUBSEQUENT TO SEPTEMBER 30, 1999:
The amended and restated intercreditor agreements were extended through
November 16, 1999, subject to earlier termination in certain events. On
November 12, 1999 the Company's shareholders approved the Agreement with
CitiFinancial Mortgage. Simultaneously, the Company, the Significant
Lenders and the Greenwich Funds entered into the second amended and
restated intercreditor agreements. Under those agreements, the lenders
agreed to keep their respective facilities in place so long as the
obligations owed to these lenders are repaid according to an agreed-upon
plan, described in the agreement.
On November 15, 1999, the Company received $96 million from CitiFinancial
Mortgage for the sale of its mortgage servicing rights related to the
mortgage loans which have been securitized, real property consisting of
IMC's Tampa, Florida headquarters building and
20
<PAGE> 23
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
IMC's leased facilities at its Ft. Washington, Pennsylvania, Cherry Hill,
New Jersey and Cincinnati, Ohio office locations. Additionally, all
furniture, fixtures and equipment and other personal property located at
the premises described above was included in the purchase. Substantially
all of the employees at the locations referred to above were offered
employment by CitiFinancial Mortgage. Under the terms of the Agreement, the
Company will receive an additional $4 million of sales proceeds over the
next two years from CitiFinancial Mortgage for this sale if certain
conditions are met.
In addition to the purchase price of $100 million, CitiFinancial Mortgage
reimbursed the Company for servicing advances made by the Company in its
capacity as servicer. As servicer of these loans, the Company is required
to advance certain interest and escrow amounts to the securitization trusts
for delinquent mortgagors and to pay expenses related to foreclosure
activities. The Company then collected the amounts from the mortgagors or
from the proceeds from liquidation of foreclosed properties. The servicing
advances at September 30, 1999 consisting of $34.8 million made to pay
escrow and foreclosure servicing advances and $24.1 million made for
delinquent interest servicing advances were recorded as accounts receivable
on the Company financial statements. The amounts owed to the Company for
reimbursement of servicing advances made in connection with escrows and
foreclosure approximated $42.6 million at November 15, 1999, and amounts
owed to the Company for reimbursement of servicing advances made in
connection with delinquent loans were $9.8 million at November 15, 1999.
The escrow and foreclosure servicing advances, which are typically
recovered by the servicer of loans over a period of up to two years, were
acquired by CitiFinancial Mortgage at a discount of 10.45%. The delinquent
interest servicing advances, which are typically repaid to the servicer of
loans monthly, were acquired by CitiFinancial Mortgage at a discount of
$3.0 million.
The proceeds from the sale of assets were used to repay certain
indebtedness of approximately $68.3 million secured by certain assets of
the Company upon the consummation of the sale of assets to CitiFinancial
Mortgage and provide working capital.
After the sale of assets to CitiFinancial Mortgage and the disposition of
its remaining subsidiaries, the Company will essentially have no ongoing
operating business, but will continue to own assets consisting primarily of
cash, accounts receivable, mortgage loans held for sale, interest-only and
residual certificates and other assets that are pledged as collateral for
the warehouse finance facilities and term debt. The assets remaining after
the sale of assets to CitiFinancial Mortgage will be either held or sold by
the Company to attempt to realize the maximum value for these assets and
repay its obligations, including the warehouse finance facilities and term
debt. If the Company receives sufficient proceeds from these remaining
assets to repay its obligations, any remaining proceeds will be used first
to redeem the Company's outstanding preferred stock and then to make
payments to the Company's common shareholders. The Company does not expect
any payment to be made to its common shareholders upon the consummation of
the sale of assets to CitiFinancial
21
<PAGE> 24
IMC MORTGAGE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
Mortgage, and the Company believes that any payment to its shareholders in
the future is unlikely but will ultimately depend upon the proceeds
received from the assets remaining after consummation of the CitiFinancial
Mortgage transaction. If any proceeds remain for the Company's common
shareholders, these proceeds would be available only after the repayment of
the Company's obligations and the redemption of the Company's preferred
stock. The redemption of preferred stock, if made, is not expected for
several years. There can be no assurance that the Company will be able to
maximize the value of its remaining assets and have adequate proceeds and
resources to satisfy its creditors and provide any value to the Company's
common shareholders or that the Company will not seek bankruptcy protection
in the future.
22
<PAGE> 25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
financial statements and notes included in Item 1 of this Quarterly Report, and
the financial statements and the notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998 and current reports on Forms 8-K dated July 22, 1999, May 27, 1999, March
3, 1999, February 26, 1999, February 23, 1999, November 27, 1998 and October
21, 1998. The following management's discussion and analysis of the Company's
financial condition and results of operations and other sections of this
Quarterly Report on Form 10-Q contain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, which involve
risks and uncertainties. You can identify forward looking statements by the use
of such words as "expect", "estimate", "intend", "project", "budget",
"forecast", "anticipate", "plan", "in the process of" and similar expressions.
Forward looking statements include all statements regarding IMC's expected
financial position, results of operations, cash flows, financing plans,
business strategies, budgets, capital and other expenditures, competitive
positions, plans and objectives of management and markets for stock. All
forward looking statements involve risks and uncertainties. In particular, any
statements contained herein regarding the consummation and benefits of the
transaction with CitiFinancial Mortgage Company ("CitiFinancial Mortgage"), as
well as expectations with respect to future sales, operating efficiencies and
product and product expansion, are subject to known and unknown risks,
uncertainties and contingencies, many of which are beyond the control of IMC,
which may cause actual results, performance or achievements to differ
materially from anticipated results, performance or achievements. Factors that
might have affected such forward looking statements prior to November 15, 1999
and subsequent include, among other things, early termination of the second
amended and restated intercreditor agreements relating to certain of IMC's
creditors, overall economic and business conditions, the demand for IMC's
services, competitive factors in the industry in which IMC competes, changes in
government regulation, continuing tightening of credit availability to the
subprime mortgage industry, increased yield requirements by asset-backed
investors, lack of continued availability of IMC's credit facilities, lack of
available funds to permit IMC to make required delinquent interest advances as
the servicer under the pooling and servicing agreements related to
securitizations that IMC services, termination of IMC's contractual rights to
service mortgage loans under the pooling and servicing agreements related to
securitizations that IMC services, reduction in real estate values, reduced
demand for non-conforming loans, changes in underwriting criteria applicable to
such loans, prepayment speeds, delinquency and default rates of mortgage loans
owned or serviced by IMC, rapid fluctuation in interest rates, risks related to
not hedging against loss of value of IMC's mortgage loan inventory, changes
which influence the loan securitization and the net interest margin securities
(excess cashflow trust) markets generally, lower than expected performance by
companies acquired by IMC, market forces affecting the price of IMC's common
stock and other uncertainties associated with IMC's current financial
difficulties and the transaction with CitiFinancial Mortgage, and other risks
identified in IMC's Securities and Exchange Commission filings.
GENERAL
IMC until November 15, 1999 was a specialized consumer finance company engaged
in purchasing, originating, servicing and selling home equity loans secured
primarily by first liens on one- to
23
<PAGE> 26
four-family residential properties. The Company focused on lending to
individuals whose borrowing needs were generally not being served by
traditional financial institutions due to such individuals' impaired credit
profiles and other factors, such as the requested loan size, the ratio of loan
amount to property value or the ratio of borrower income to total debt
payments. Loan proceeds typically are used by such individuals to consolidate
debt, to refinance debt, to finance home improvements, to pay educational
expenses and for a variety of other uses. By focusing on individuals with
impaired credit profiles and providing prompt responses to their borrowing
requests, the Company has been able to charge higher interest rates for its
loan products than typically are charged by conventional mortgage lenders.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998.
Net loss for the three months ended September 30, 1999 was $64.5 million
representing a decrease of $66.7 million from net income of $2.2 million for
the three months ended September 30, 1998. The decrease in net income resulted
principally from a decrease in gain on sale of loans of $47.9 million or 89.3%
to $5.7 million for the three months ended September 30, 1999 from $53.6
million for the three months ended September 30, 1998 and $9.1 million of
interest expense and commitment fees associated with the credit facility
provided by Greenwich Street Capital Partners II, L.P. and certain related
affiliates (the "Greenwich Funds"). The decrease in net income was also
attributable to a $2.5 million or 17.7% decrease in servicing fees to $11.4
million for the three months ended September 30, 1999 from $13.9 million for
the three months ended September 30, 1998 and an $8.3 million or 67.1% decrease
in net warehouse interest income to $4.1 million for the three months ended
September 30, 1999 from $12.4 million for the three months ended September 30,
1998. Also contributing to the decrease in net income was a goodwill impairment
charge of $8.0 million and other charges of $8.0 million during the three
months ended September 30, 1999 related to losses from the disposal of the
Company's operating subsidiaries. The decrease in net income was partially
offset by a $1.7 million or 43.6% increase in other revenue to $5.6 million for
the three months ended September 30, 1999 from $3.9 million for the three
months ended September 30, 1998.
The decrease in income was also partially offset by a $11.6 million or 39.1%
decrease in compensation and benefits to $18.1 million for the three months
ended September 30, 1999 from $29.7 million for the three months ended
September 30, 1998.
Net loss before taxes was increased by a provision for income taxes of $0.7
million for the three months ended September 30, 1999 compared to a provision
for income taxes of $1.5 million for the three months ended September 30, 1998.
No income tax benefit has been applied to the net loss for the three months
ended September 30, 1999 as the Company determined it cannot be assured that
the income tax benefit could be realized in the future.
REVENUES
The following table sets forth information regarding components of the
Company's revenues for the three months ended September 30, 1999 and 1998:
24
<PAGE> 27
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
-------------------------------
1999 (in thousands) 1998
---- ----
<S> <C> <C>
Gain on sales of loans $ 5,738 $ 53,604
-------- --------
Warehouse interest income 13,361 47,005
Warehouse interest expense (9,280) (34,584)
-------- --------
Net warehouse interest income 4,081 12,421
-------- --------
Servicing fees 11,448 13,916
Other 5,590 3,892
-------- --------
Total revenues $ 26,857 $ 83,833
======== ========
</TABLE>
Gain on Sales of Loans. For the three months ended September 30, 1999, gain on
sales of loans decreased to $5.7 million from $53.6 million for the three
months ended September 30, 1998, a decrease of 89.3% due primarily to a
decrease in loans sold. The total volume of loans produced decreased by 86.2%
to approximately $263.1 million for the three months ended September 30, 1999
from a total volume of approximately $1.9 billion for the three months ended
September 30, 1998. Originations by the Company's correspondent network
decreased 98.0% to approximately $24.4 million for the three months ended
September 30, 1999 from approximately $1.2 billion for the three months ended
September 30, 1998, while production from the Company's broker network and
direct lending operations decreased by 64.1% to approximately $238.7 million
for the three months ended September 30, 1999 from approximately $665 million
for the three months ended September 30, 1998.
The Company sells the loans it purchases or originates through one of two
methods: (i) securitization, which involves the private placement or public
offering of pass-through mortgage-backed securities, or (ii) whole loan sales,
which involve selling blocks of loans to single purchasers. During the three
months ended September 30, 1999, based on the Company's lack of liquidity and
adverse market conditions, the Company was unable to sell any loans through the
securitization market. Mortgage loans delivered to securitization trusts
decreased by $1.4 billion, a decrease of 100% to $0 for the three months ended
September 30, 1999 from $1.4 billion for the three months ended September 30,
1998. Mortgage loans sold in the whole loan market decreased by approximately
$177 million to approximately $347 million for the three months ended September
30, 1999 from approximately $524 million for the three months ended September
30, 1998.
Net Warehouse Interest Income. Net warehouse interest income decreased to $4.1
million for the three months ended September 30, 1999 from $12.4 million for
the three months ended September 30, 1998, a decrease of 67.1%. The decrease in
the three month period ended September 30, 1999 reflected decreased mortgage
loan production and mortgage loans held for sale and increased interest rates
related to the Company's warehouse finance facilities.
Servicing Fees. Servicing fees decreased to $11.4 million for the three months
ended September 30, 1999 from $13.9 million for the three months ended
September 30, 1998, a decrease of 17.7%. Servicing fees for the three months
ended September 30, 1999 were negatively affected by a decrease in mortgage
loans serviced for others over the prior period. The average portfolio of
mortgage loans serviced for others decreased by approximately $1.3 million or
17.4% to approximately $6.3 billion
25
<PAGE> 28
for the three months ended September 30, 1999 from approximately $7.6 billion
for the three months ended September 30, 1998.
Other. Other revenues, consisting principally of prepayment penalties from
borrowers who prepay the outstanding balance of their mortgage, increased by
43.6% to $5.6 million for the three months ended September 30, 1999 from $3.9
million for three months ended September 30, 1998.
EXPENSES
The following table sets forth information regarding components of the
Company's expenses for the three months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
------------------------------
1999 (in thousands) 1998
---- ----
<S> <C> <C>
Compensation and benefits $ 18,061 $ 29,677
Selling, general and administrative 28,228 28,384
Other interest expense 7,713 7,137
Interest expense - Greenwich Funds 9,105 --
Market valuation adjustment 11,521 --
Goodwill impairment charge 7,981 --
Other charges 7,996 --
Hedge loss -- 14,953
-------- --------
Total expenses $ 90,605 $ 80,151
======== ========
</TABLE>
Compensation and benefits decreased by $11.6 million or 39.1% to $18.1 million
for the three months ended September 30, 1999 from $29.7 million for the three
months ended September 30, 1998, principally due to a reduction of personnel to
originate mortgage loans and the disposal of six of the Company's eight
operating subsidiaries during the three months ended September 30, 1999.
Selling, general and administrative expenses remained approximately the same
with $28.2 million for the three months ended September 30, 1999 and $28.3
million for the three months ended September 30, 1998.
Other interest expense increased by $0.6 million or 8.1% to $7.7 million for
the three months ended September 30, 1999 from $7.1 million for the three
months ended September 30, 1998 principally as a result of an increase in
outstanding term debt during the three months ended September 30, 1999 as
compared to the three months ended September 30, 1998.
Interest expense - Greenwich Funds consists of interest charges and commitment
fees related to the Greenwich Loan Agreement (as defined in "Liquidity and
Capital Resources"), the Note Purchase Agreements (as defined in "Liquidity and
Capital Resources") and the $95.0 million credit facilities the Greenwich Funds
purchased from BankBoston on February 19, 1999. See Note 5 "Warehouse Finance
Facilities, Term Debt and Notes Payable" of Notes to Consolidated Financial
Statements.
Market valuation adjustment, which represents the realized loss on
the Company's interest-only and
26
<PAGE> 29
residual certificates, increased to $11.5 million for the three months ended
September 30, 1999 from $0 for the three months ended September 30, 1998 due to
higher than anticipated losses and prepayments in the Company's portfolio for
the three months ended September 30, 1999.
Goodwill impairment charge of $8.0 million for the three months ended September
30, 1999 represents the write-down of goodwill resulting from the Company's
formal plan to dispose of its eight operating subsidiaries as described in Note
7 "Disposal of Assets" of Notes to Consolidated Financial Statements.
Other charges of $8.0 million represent the loss on disposal expenses incurred
or accrued relating to, among other things, disposal of assets, lease
termination costs and costs of disposal of the Company's eight operating
subsidiaries for the three months ended September 30, 1999.
Income Taxes. The provision for income taxes for the three months ended
September 30, 1999 was approximately $0.7 million, which differed from the
federal tax rate of 35% primarily due to state income taxes, amortization
expenses related to goodwill and a full valuation allowance established against
the deferred tax asset.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998.
Net loss for the nine months ended September 30, 1999 was $264.9 million
representing a decrease of $298.5 million from net income of $33.6 million for
the nine months ended September 30, 1998. The decrease in net income resulted
principally from a goodwill impairment charge of $85.4 million, a $74.4 million
mark-to-market adjustment in the value of the Company's interest-only and
residual certificates and a $147.7 million or 79.8% decrease in gain on sale of
loans to $37.4 million for the nine months ended September 30, 1999 from $184.7
million for the nine months ended September 30, 1998. Also contributing to the
decrease in net income was an increase of $24.5 million of interest expense,
commitment fees and other charges associated with credit facilities provided by
the Greenwich Funds. The decrease in net income was also attributable to a
$10.2 million or 38.8% decrease in net warehouse interest income to $16.0
million for the nine months ended September 30, 1999 from $26.2 million for the
nine months ended September 30, 1998 and other charges of $13.2 million during
the nine months ended September 30, 1999 related to losses from the disposal of
the Company's operating subsidiaries, investments in international operations
and closing the Rhode Island branch office location. The decrease in net income
was partially offset by a $3.0 million or 8.9% increase in servicing fees to
$36.6 million for the nine months ended September 30, 1999 from $33.6 million
for the nine months ended September 30, 1998.
The decrease in net income was also partially offset by a $20.4 million or
22.3% decrease in compensation and benefits to $71.2 million for the nine
months ended September 30, 1999 from $91.5 million for the nine months ended
September 30, 1998 and a $6.5 million or 7.7% decrease in selling, general and
administrative expenses to $77.7 million for the nine months ended September
30, 1999 from $84.2 million for the nine months ended September 30, 1998. The
decrease in net income was partially attributable to a $6.2 million or 35.8%
increase in other interest expense to $23.5 million for the nine months ended
September 30, 1999 from $17.3 million for the nine months ended September 30,
1998.
Net loss before taxes was increased by a provision for income taxes of $5.4
million for the nine months ended September 30, 1999 compared to a provision
for income taxes of $23.4 million for the nine
27
<PAGE> 30
months ended September 30, 1998. No income tax benefit has been applied to the
net loss for the nine months ended September 30, 1999, as the Company
determined it cannot be assured that the income tax benefit could be realized
in the future.
REVENUES
The following table sets forth information regarding components of the
Company's revenues for the nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
------------------------------
1999 (in thousands) 1998
---- ----
<S> <C> <C>
Gain on sales of loans $ 37,377 $184,743
-------- --------
Warehouse interest income 48,526 127,225
Warehouse interest expense (32,491) (101,021)
-------- --------
Net warehouse interest income 16,035 26,204
-------- --------
Servicing fees 36,578 33,593
Other 20,410 20,467
-------- --------
Total revenues $110,400 $265,007
======== ========
</TABLE>
Gain on sales of loans. For the nine months ended September 30, 1999, gain on
sales of loans decreased to $37.4 million from $184.7 million for the nine
months ended September 30, 1998, a decrease of 79.8%, due primarily to a
decrease in loans sold. The total volume of loans produced decreased by 82.6%
to approximately $957.0 million for the nine months ended September 30, 1999
from a total volume of approximately $5.5 billion for the nine months ended
September 30,1998. Originations by the Company's correspondent network
decreased 98.0% to approximately $72.8 million for the nine months ended
September 30, 1999 from approximately $3.7 billion for the nine months ended
September 30, 1998, while production from the Company's broker network and
direct lending operations decreased by 50.9% to approximately $884.2 million
for the nine months ended September 30, 1999 from approximately $1.8 billion
for the nine months ended September 30, 1998.
The Company sells the loans it purchases or originates through one of two
methods: (i) securitization, which involves the private placement or public
offering of pass-through mortgage-backed securities, or (ii) whole loan sales,
which involve selling blocks of loans to single purchasers. During the nine
months ended September 30, 1999, based on the Company's lack of liquidity and
adverse market conditions, the Company was unable to sell any loans through the
securitization market. Mortgage loans delivered to securitization trusts
decreased by $4.5 billion, a decrease of 100.0% to $0 for the nine months ended
September 30, 1999 from $4.5 billion for the nine months ended September 30,
1998. Mortgage loans sold in the whole loan market decreased by approximately
$111 million, to approximately $787 million for the nine months ended September
30, 1999 from approximately $898.0 million for the nine months ended September
30, 1998.
Net Warehouse Interest Income. Net warehouse interest income decreased to $16.0
million for the nine months ended September 30, 1999 from $26.2 million for the
nine months ended September 30, 1998, a decrease of 38.8%. The decrease in the
nine-month period ended September 30, 1999 reflected decreased mortgage loan
production and mortgage loans held for sale and increased interest rates
related to the Company's warehouse finance facilities.
28
<PAGE> 31
Servicing Fees. Servicing fees increased to $36.6 million for the nine months
ended September 30, 1999 from $33.6 million for the nine months ended September
30, 1998, an increase of 8.9%. Servicing fees for the nine months ended
September 30, 1999 were positively affected by an increase in mortgage loans
serviced for others from the prior period. The average portfolio of mortgage
loans serviced for others increased by approximately $177 million or 2.4% to
approximately $7.6 billion for the nine months ended September 30, 1999 from
approximately $7.4 billion for the nine months ended September 30, 1998.
Other. Other revenues, consisting principally of prepayment penalties from
borrowers who prepay the outstanding balance of their mortgage, remained
approximately the same with $20.4 million for the nine months ended September
30, 1999 and $20.5 million in nine months ended September 30, 1998.
EXPENSES
The following table sets forth information regarding components of the
Company's expenses for the nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
For the nine months
Ended September 30,
------------------------------
1999 (in thousands) 1998
<S> <C> <C>
Compensation and benefits $ 71,158 $ 91,537
Selling, general and administrative 77,705 84,193
Other interest expense 23,502 17,309
Interest expense-Greenwich Funds 24,484 --
Market valuation adjustment 74,397 --
Goodwill impairment charge 85,427 --
Other charges 13,175 --
Hedge loss 0 14,953
-------- --------
Total expenses $369,848 $207,992
======== ========
</TABLE>
Compensation and benefits decreased by $20.4 million or 22.3% to $71.2 million
for the nine months ended September 30, 1999 from $91.5 million for the nine
months ended September 30, 1998, principally due to a reduction of personnel to
originate mortgage loans and the disposal of six of the Company's eight
operating subsidiaries during the nine months ended September 30, 1999.
Selling, general and administrative expenses decreased by $6.5 million or 7.7%
to $77.7 million for the nine months ended September 30, 1999 from $84.2
million for the nine months ended September 30, 1998 principally due to a
decrease in underwriting and originating costs as a result of a decrease in the
volume of mortgage loan production.
Other interest expense increased by $6.2 million or 35.8% to $23.5 million for
the nine months ended September 30, 1999 from $17.3 million for the nine months
ended September 30, 1998 principally as a result of increased interest expense
due to increased term debt outstanding during the nine months ended September
30, 1999 as compared to the nine months ended September 30, 1998.
Interest expense - Greenwich Funds consists of interest charges and commitment
fees related to the Greenwich Loan Agreement (as defined in "Liquidity and
Capital Resources"), the Note Purchase Agreements (as defined in "Liquidity and
Capital Resources"), and the $95 million credit facilities the Greenwich Funds
purchased from BankBoston on February 19, 1999, as well as amortization of the
value attributable to the Class C preferred stock issued and the additional
preferred stock issuable to the Greenwich Funds in exchange for its loan under
the terms of the Agreement.
29
<PAGE> 32
See Note 5 "Warehouse Finance Facilities, Term Debt and Notes Payable" of Notes
to Consolidated Financial Statements included herein.
Market valuation adjustment, which represents the realized loss on the Company's
interest-only and residual certificates for the nine months ended September 30,
1999, increased to $74.4 million for the nine months ended September 30, 1999
from $0 for the nine months ended September 30, 1998 related to higher than
anticipated losses and prepayments in the Company's serviced loan portfolio.
During the second quarter of 1999, as a result of trends in the Company's
serviced loan portfolio and adverse market conditions in the non-conforming
mortgage industry, the Company revised the loss assumption used to approximate
the timing of losses over the life of the securitized loans so that expected
losses from defaults gradually increase from zero in the first six months of the
loan to 275 basis points after 30 months, representing estimated aggregate
losses over the life of the pool (i.e., historical plus future losses) of
approximately 4.3% of original pool balances. The revised loss assumption
resulted in a decrease to the estimated fair value of the interest-only and
residual certificates of $62.9 million for the six months ended June 30, 1999,
which is included in the market valuation adjustment of $74.4 million for the
nine months ended September 30, 1999. During the fourth quarter of 1998, based
on emerging trends in the Company's portfolio and adverse market conditions, the
Company revised its loss curve assumptions so that expected losses from defaults
gradually increased from zero in the first six months of the loan to 175 basis
points after 36 months. The Company believes the adverse market conditions
affecting the non-conforming mortgage industry may limit the Company's
borrowers' ability to refinance existing delinquent mortgage loans serviced by
the Company with other non-conforming mortgage lenders that market their
products to borrowers that are less credit-worthy. As a result the frequency of
default may increase.
Goodwill impairment charge represents the write-down of goodwill resulting from
the Company's formal plan to dispose of its eight operating subsidiaries as
describe in Note 7 "Disposal of Assets" of Notes to Consolidated Financial
Statements.
Other charges represent expenses incurred or accrued relating to, among other
things, disposal of assets, lease termination costs and costs of disposal of
the Company's eight operating subsidiaries, investments in international
operations and the Company's Rhode Island branch location.
Income Taxes. The provision for income taxes for the nine months ended
September 30, 1999 was approximately $5.4 million which differed from the
federal tax rate of 35% primarily due to state income taxes, amortization
expenses related to goodwill and a full valuation allowance established against
the deferred tax asset.
FINANCIAL CONDITION
September 30, 1999 Compared to December 31, 1998
Mortgage loans held for sale, net, at September 30, 1999 were $514.6 million, a
decrease of $431.9 million or 45.6% from mortgage loans held for sale of $946.4
million at December 31, 1998. Included
30
<PAGE> 33
in mortgages held for sale, net, at September 30, 1999 and December 31, 1998
were $56.1 million and $84.6 million, respectively, of mortgage loans which
were not eligible for securitization due to delinquency and other factors
(loans under review). The amount by which cost exceeds market value on loans
under review is accounted for as a valuation allowance. The valuation
allowances at September 30, 1999 and December 31, 1998 were $16.2 million and
$21.0 million, respectively.
Accounts receivable increased $19.4 million or 43.4% to $64.1 million at
September 30, 1999 from $44.7 million at December 31, 1998, primarily due to an
increase in servicing advances outstanding. As the servicer for the
securitization trusts, the Company is required to advance certain principal,
interest and escrow amounts to the securitization trust for the delinquent
mortgagors and to pay expenses related to foreclosure activities. The Company
then collects the amounts from the mortgagors or from the proceeds from
liquidation of foreclosed properties. As discussed in Note 9 "Events Subsequent
to September 30, 1999" of Notes to Consolidated Financial Statements included
herein, on November 15, 1999 CitiFinancial Mortgage reimbursed the Company for
its servicing advances, at a discount.
Interest-only and residual certificates at September 30, 1999 were $314.1
million, representing a decrease of $154.7 million or 33.0% from interest-only
and residual certificates of $468.8 million at December 31, 1998. Mortgage
servicing rights decreased $14.4 million or 27.4% to $38.0 million at September
30, 1999 from $52.4 million December 31, 1998. The decrease in mortgage
servicing rights consists of amortization of $14.2 million. The decrease in
interest-only and residual certificates resulted from the receipt of cash on
the interest-only and residual certificates in the nine months ended September
30, 1999 of $80.3 million and from market valuation adjustments, including
revision of the loss curve assumption used to approximate the timing of losses
over the life of the securitized loans. See Note 6 "Interest Only and Residual
Certificates" of Notes to Consolidated Financial Statements included herein.
As discussed in Note 9 "Events Subsequent to September 30, 1999" of Notes to
Consolidated Financial Statements included herein, on November 15, 1999, the
Company sold its mortgage servicing rights to CitiFinancial Mortgage.
Goodwill decreased $89.6 million to $0 million at September 30, 1999 from $89.6
million at December 31, 1998 due to a $85.4 million impairment charge related
to the Company's formal plan to dispose of its eight operating subsidiaries,
amortization of goodwill, and elimination of the $1.9 million carrying amount
of goodwill associated with the acquisition of MCC.
The events described in Note 7 "Disposal of Assets" of Notes to Consolidated
Financial Statements included herein and the continued decline in financial
results of the Company resulted in an evaluation of the goodwill associated
with the Company's eight operating subsidiaries for possible impairment at
September 30, 1999. The Company reviews the potential impairment of goodwill on
a non-discounted cash flow basis to assess recoverability. The cash flows are
projected on a pre-tax basis over the estimated useful lives assigned to
goodwill. The events described above led the Company to determine that the
useful lives assigned to goodwill should be reduced to less than one year. The
resulting evaluation of the goodwill associated with the eight operating
subsidiaries resulted in a goodwill impairment charge of $85.4 million.
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Borrowings under warehouse financing facilities at September 30, 1999 were
$568.4 million, a decrease of $416.1 million or 42.3% from borrowings under
warehouse financing facilities of $984.6 million at December 31, 1998. This
decrease was a result of decreased mortgage loans held for sale, caused by
IMC's significant lenders imposing restrictions on IMC's ability to borrow
funds to originate mortgage loans. See " -Liquidity and Capital Resources"
included herein and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and Note 3 of Notes to the Consolidated Financial
Statements "Warehouse Finance Facilities, Term Debt and Notes Payable" included
therein.
Term debt and notes payable at September 30, 1999 was $415.9 million,
representing a decrease of $16.8 million or 3.9% from term debt and notes
payable of $432.7 million at December 31, 1998. This decrease was primarily a
result of repayment of certain amounts under term debt from cash flows received
from interest-only and residual certificates as provided in the amended and
restated intercreditor agreements. Additional borrowings from the Greenwich
Funds included $21.4 million outstanding at September 30, 1999 under the Note
Purchase Agreements and $38.4 million outstanding at September 30,1999 related
to a Note Purchase Agreement. See Note 5 "Warehouse Finance Facilities, Term
Debt and Notes Payable" of Notes to Consolidated Financial Statements included
herein.
The Company's net deferred tax asset of $21.2 at September 30, 1999, after
valuation allowance, represented no change from a deferred tax asset, after
valuation allowance, of $0 at December 31, 1998. The deferred tax asset is
primarily due to temporary differences in the recognition of market valuation
adjustments, income related to the Company's interest-only and residual
certificates for income tax purposes and a full valuation allowance on the
deferred tax asset.
Redeemable preferred stock, consisting of Class A ($21.2 million) and Class C
($18.3 million), increased $2.2 million to $39.5 million at September 30, 1999
from $37.3 million at December 31, 1998, due to accretion of the preferred stock
discount. In July 1998, the Company sold $50 million of Class A redeemable
preferred stock to certain of the Greenwich Funds and Travelers Casualty and
Surety Company ("Travelers"). The Class A redeemable preferred stock was
convertible into non-registered common stock at $10.44 per share. As described
in Note 4 "Preferred Stock" of Notes to the December 31, 1998 Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, the conversion feature was eliminated in
October 1998. The elimination of the conversion feature resulted in a discount
to the Class A redeemable preferred stock of approximately $32 million, which
was charged to paid in capital in 1998 and is being accreted to preferred stock
until the mandatory redemption dates beginning in 2008.
In October 1998, the Company issued 23,760.758 shares of Class C exchangeable
preferred stock to certain of the Greenwich Funds in conjunction with a $33
million credit facility provided by certain of the Greenwich Funds as described
in Note 4 "Preferred Stock" of Notes to the December 31, 1998 Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998. The preferred stock was recorded at $18.3
million based on an allocation of the proceeds from the $33 million credit
facility.
Total stockholders' deficit as of September 30, 1999 was $56.2 million, a
decrease of $266.8 million over stockholders' equity of $210.6 million at
December 31, 1998. Stockholders equity decreased for the nine months ended
September 30, 1999 primarily as a result of a net loss of $264.9 million.
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LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1999, the Company used its cash flow
from the sale of loans through whole loan sales, loan origination fees,
processing fees, net interest income, servicing fees and borrowings under its
warehouse and term debt facilities to meet its working capital needs. The
Company's cash requirements during the nine months ended September 30, 1999
included the funding of loan purchases and originations, payment of principal
and interest costs on borrowings, operating expenses, and capital expenditures.
The Company, until November 15, 1999 had an ongoing need for substantial amounts
of capital. Adequate credit facilities and other sources of funding were
essential to the continuation of the Company's ability to purchase and originate
loans. The Company typically has operated, and expects to continue to operate,
on a negative operating cash flow basis. During the nine months ended September
30, 1999, the Company received cash flows from operating activities of $444.5
million, an increase of $631.2 million from cash flows used in operating
activities of $186.7 million during the nine months ended September 30, 1998.
During the nine months ended September 30, 1999, cash flows used by the Company
in financing activities were $438.4 million, a decrease of $620.7 million from
cash flows received from financing activities of $182.3 million during the nine
months ended September 30, 1998. The cash flows received from operating
activities relate primarily to the sale of mortgage loans held for sale and cash
flows used in financing activities related primarily to the repayment of
warehouse finance facilities borrowings.
Significant cash outflows are incurred upon the closing of a securitization
transaction; however, the Company does not receive a significant portion of the
cash representing the gain until later periods when the related loans are
repaid or otherwise collected. The Company borrows funds on a short-term basis
to support the accumulation of loans prior to sale. These short-term borrowings
are made under warehouse lines of credit with various lenders.
During the year ended December 31, 1998, equity, debt and asset-backed markets
were extremely volatile, effectively denying the Company access to publicly
traded debt and equity markets to fund cash needs. Additionally, the spread
over treasury securities demanded by investors to acquire newly issued
asset-backed securities widened, resulting in less profitable gain on sales of
loans sold through securitization. The Company responded by reducing the
premium the Company pays to correspondents and brokers to acquire loans, but
the reduction of premiums in the future may not offset the wider spreads
demanded by investors. Investors may not continue to invest in the Company's
asset-backed securities at all.
As a result of these adverse market conditions, among other things, in October
1998 the Company entered into intercreditor arrangements with Paine Webber Real
Estate Securities, Inc. (Paine Webber), Bear Stearns Home Equity Trust 1996-1
(Bear Stearns) and Aspen Funding Corp. and German American Capital Corporation,
subsidiaries of Deutsche Bank of North America Holding Corp. (DMG)
(collectively, the "Significant Lenders"), which held $533.6 million of the
Company's outstanding warehouse lines and approximately $241.9 million of the
Company's interest-only and residual financing at September 30, 1999. The
intercreditor arrangements provided for the Significant Lenders to "standstill"
and keep outstanding balances under their facilities in place, subject to
certain conditions,
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for up to 90 days (which expired mid-January 1999) to allow the Company to
explore its financial alternatives. The intercreditor agreements also provided,
subject to certain conditions, that the lenders would not issue any margin
calls requesting additional collateral be delivered to the lenders. See the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, Note 3 of Notes to the Consolidated Financial Statements "Warehouse
Finance Facilities, Term Debt and Notes Payable" included therein.
In mid-January 1999, the original intercreditor agreements expired; however, on
February 19, 1999, concurrent with the execution of the Acquisition Agreement
described in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and Note 17 of Notes to Consolidated Financial Statements
"Significant Events and Events Subsequent to December 31, 1998" included
therein, the Company entered into amended and restated intercreditor agreements
with the Significant Lenders. Under the amended and restated intercreditor
agreements, the Significant Lenders agreed to keep their respective facilities
in place through the closing under the Acquisition Agreement if the closing
occurred within five months, and for twelve months thereafter, subject to
earlier termination in certain events. The intercreditor agreements required the
Company to make various amortization payments on the underlying debt. Failure to
make the required payments would permit the Significant Lenders to terminate the
standstill period under the intercreditor agreements and to exercise remedies.
These amended and restated intercreditor agreements were amended as described
herein.
At September 30, 1999, the Company had a $1.25 billion uncommitted warehouse
and residual financing facility with Paine Webber. This warehouse facility
bears interest rates at rates ranging from LIBOR plus 0.65% to LIBOR plus
0.90%. Approximately $55.4 million was outstanding under this warehouse
facility as of September 30, 1999. The Company, prior to November 15, 1999, had
informally requested that Paine Webber permit funding of an additional $200
million under its warehouse facilities, but was notified that Paine Webber did
not intend to make any additional advances.
At September 30, 1999, the Company also had a $1.0 billion uncommitted warehouse
facility with Bear Stearns. This facility bears interest at LIBOR plus 0.75%.
Approximately $348.3 million was outstanding under this facility at September
30, 1999. Bear Stearns, prior to November 15, 1999, requested that the Company
maintain outstanding amounts under this warehouse facility at no more that $500
million.
At September 30, 1999, the Company had a $1.0 billion credit facility with DMG,
which included a $100 million credit facility collateralized by interest-only
and residual certificates. Approximately $129.9 million was outstanding for
warehousing of mortgage loans at September 30, 1999. DMG, prior to November 15,
1999, had indicated to the Company that it did not plan to make any additional
advances. To induce DMG to enter the intercreditor agreement in October 1998,
the Company was required to convert DMG's committed warehouse and residual
facility to an uncommitted facility. See the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 and Note 3 "Warehouse Finance
Facilities, Term Debt and Notes Payable" of Notes to Consolidated Financial
Statements included therein.
At September 30, 1999, the Company had an expired warehouse facility with
Residential Funding Corporation ("RFC") which bears interest at LIBOR plus
1.25%. At September 30, 1999, approximately $29.9 million was outstanding under
this facility, which expired on August
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31, 1999. The RFC credit facility requires the Company to comply with various
financial covenants, including, among other things, minimum net worth tests and
a minimum pledged servicing portfolio. At September 30, 1999, the Company's net
worth, tangible net worth, and pledged servicing portfolio were below the
minimum requirements under the convenants of the RFC credit facility. The
Company is in the process of selling the mortgage loans which collateralize the
warehouse facility and repaying the amount outstanding under the RFC credit
facility.
Additionally, at September 30, 1999, approximately $4.9 million was outstanding
under another warehouse line of credit, which bears interest at LIBOR plus 1.5%
and has expired and is not expected to be renewed.
Outstanding borrowings under the Company's warehouse financing facilities are
collateralized by mortgage loans held for sale and servicing rights on
approximately $210 million of mortgage loans. Upon the sale of these loans, the
proceeds are used to repay the borrowings under these lines.
The Company, prior to November 15, 1999 had attempted to enter into
arrangements to obtain warehouse facilities from lenders that were not
currently providing warehouse financing to IMC, but was not successful.
At September 30, 1999, the Company had borrowed $128.3 million under its
residual financing credit facility with Paine Webber. Outstanding borrowings
bear interest at LIBOR plus 2.0% and are collateralized by the Company's
interest in certain interest-only and residual certificates.
Bear, Stearns & Co. Inc. and its affiliates, Bear, Stearns Mortgage Capital
Corporation and Bear, Stearns International Limited, provide the Company with a
residual financing credit facility which is collateralized by the Company's
interest in certain interest-only and residual certificates. At September 30,
1999, $76.6 million was outstanding under this credit facility, which bears
interest at 1.75% per annum in excess of LIBOR.
At September 30, 1999, outstanding interest-only and residual financing
borrowings under the Company's credit facility with DMG were $37.0 million.
Outstanding borrowings bear interest at LIBOR plus 2% and are collateralized by
the Company's interest in certain interest-only and residual certificates.
At September 30, 1999, the Company had outstanding $1.8 million under a
residual financing credit facility which matured in August 1998, bears interest
at 2.0% per annum in excess of LIBOR and is collateralized by the Company's
interest in certain interest-only and residual certificates. The cash flow
realized by the Company from the interest in certain interest-only and residual
certificates collateralizing the $1.8 million borrowed is being used to repay
the amounts owed.
At September 30, 1999 the Company also had outstanding $4.8 million under a
credit facility with a financial institution which bears interest at 10% per
annum. That credit facility provides for repayment of principal and interest
over 36 months through October 2001.
BankBoston provided the Company with a revolving credit facility which matured
in October 1998, bore interest at LIBOR plus 2.75% and provided for borrowings
up to $50 million to be used to finance
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interest-only and residual certificates, or for acquisitions or bridge
financing. BankBoston with participation from another financial institution
also provided the Company with a $45 million working capital facility, which
bore interest at LIBOR plus 2.75% and matured in October 1998. After maturity,
the interest rates on these facilities increased to prime plus 2% per annum.
The Company was unable to repay these credit facilities when they matured and
in October 1998, the Company entered into a forbearance and intercreditor
agreement with BankBoston with respect to these credit facilities. The
forbearance and intercreditor agreement provided that the bank would take no
collection action, subject to certain conditions, for up to 90 days (which
expired mid-January 1999) in order for the Company to explore its financial
alternatives.
In mid-January 1999, the forbearance and intercreditor agreement with
BankBoston expired. On February 19, 1999, $87.5 million was outstanding under
these credit facilities. On February 19, 1999, the Greenwich Funds purchased,
at a discount, from BankBoston its interest in the credit facilities and
entered into an amended intercreditor agreement relating to these facilities
with the Company.
The Company is required to advance monthly delinquent interest as the servicer
under the pooling and servicing agreements related to securitizations the
Company services. The Company typically makes these advances to the
securitizations on or about the 18th of each month and such advances are
typically repaid by the securitizations over a 30 day period. In this respect,
on April 19, 1999, the Company borrowed $15 million from the Greenwich Funds
pursuant to secured promissory notes to fund a portion of delinquent interest
advance to the securitizations. These notes bore interest at a rate of 20% per
annum. These notes have been repaid in full.
On May 18, 1999, the Company entered into a Note Purchase and Amendment
Agreement (the "Note Purchase Agreement") with the Greenwich Funds to provide
the Company access to short-term financing to enable the Company to continue to
make the required monthly delinquent interest advances. Borrowings under the
Note Purchase Agreement bear interest at 20% per annum. On May 18, 1999, the
Greenwich Funds loaned the Company an aggregate of $33.0 million under the Note
Purchase Agreement to fund a portion of the delinquent interest advance to the
securitizations. In consideration for these loans, the Company paid the
Greenwich Funds a $1.2 million commitment fee. The $33.0 million borrowed under
the Note Purchase Agreement has been repaid in full.
On June 18, 1999, the Greenwich Funds loaned the Company an aggregate of $35.0
million under the Note Purchase Agreement to fund a portion of the delinquent
interest advance to the securitizations. In consideration for these loans, the
Company agreed to pay Greenwich Funds a $1.0 million commitment fee. The $35.0
million borrowed under the Note Purchase Agreement has been repaid in full.
On July 16, 1999, the Company borrowed $45.0 million under the Note Purchase
Agreement to fund a portion of the delinquent interest advance to the
securitizations. In consideration for these loans, the Company paid the
Greenwich Funds a $1.25 million commitment fee. The $45.0 million borrowed under
the Note Purchase Agreement has been repaid in full.
On August 18, 1999, the Company borrowed $45.0 million under the Note Purchase
Agreement to fund a portion of the delinquent interest advance to the
securitizations. In consideration for these loans the Company paid the Greenwich
Funds a $1.25 million commitment fee. The $45.0 million borrowed under the Note
Purchase Agreement has been repaid in full.
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On September 18, 1999, the Company borrowed $45.0 million under the Note
Purchase Agreement to fund a portion of the delinquent interest advance to
securitizations. In consideration for their loans, the Company paid the
Greenwich Funds a $1.25 million commitment fee. At September 30, 1999 $21.4
million was outstanding under the Note Purchase Agreement. The $45.0 million
borrowed under the Note Purchase Agreement has been repaid in full.
On October 18, 1999, the Company borrowed $60.0 million under the Note Purchase
Agreement to fund a portion of the delinquent interest advance to the
securitizations. In consideration for their loans, the Company paid the
Greenwich Funds a $1.50 million commitment fee. The $60 million borrowed under
the Note Purchase Agreement has been repaid in full.
As discussed in Note 9 "Events Subsequent to September 30, 1999" of Notes to
Consolidated Financial Statements included herein, on November 15, 1999 the
Company sold its mortgage servicing rights related to the mortgage loans which
have been securitized. Accordingly, subsequent to November 15, 1999, the Company
will no longer be required to advance monthly delinquent interest as the
servicer under the pooling and servicing agreements related to the mortgage
loans which have been securitized.
On July 14, 1998, Travelers and certain of the Greenwich Funds (together, the
"Purchasers") purchased $50 million of the Company's Class A preferred stock.
The Class A preferred stock was convertible into common stock at $10.44 per
share. The Class A preferred stock bears no dividend and is redeemable by the
Company over a three-year period commencing in July 2008. The Purchasers were
also granted an option to purchase, within the next three years, an additional
$30 million of Series B redeemable preferred stock at par. The Class B preferred
stock was convertible into common stock at $22.50 per share. In October 1998,
the terms of the $50 million Class A preferred stock and the terms of the Class
B preferred stock were amended to eliminate the right to convert into common
stock. See Note 4 "Preferred Stock" of Notes to the December 31, 1998
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
On October 15, 1998 the Company entered into an agreement for a $33 million
standby revolving credit facility with certain of the Greenwich Funds. The
facility was available to provide working capital for a period of up to 90
days, or until mid-January 1999. The terms of the standby revolving credit
facility resulted in substantial dilution of existing common stockholders'
equity equal to a minimum of 40%, up to a maximum of 90%, on a diluted basis,
depending on (among other things) when, or whether, a change of control
transaction occurs. In mid-January 1999, the $33 million standby revolving
credit facility matured. On February 16, 1999, the Greenwich Funds made
additional loans totaling $5 million available under the facility. On February
19, 1999, the Company and the Greenwich Funds entered into an amended and
restated intercreditor agreement, whereby the Greenwich Funds agreed to keep
the facility in place for a period through the closing under the Acquisition
Agreement if the closing occurred within a five month period and for twelve
months thereafter, subject to earlier termination in certain events as provided
in the amended and restated intercreditor agreement. At September 30, 1999,
$38.0 million was outstanding under this facility.
On February 19, 1999, the Company entered into a merger agreement with the
Greenwich Funds which was terminated and recast as an acquisition agreement on
March 31, 1999. Under the Acquisition Agreement, the Company agreed to issue
common stock to the Greenwich Funds representing approximately 93.5% of the
outstanding common stock after each issuance, leaving the existing
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common shareholders of the Company with 6.5% of the common stock outstanding.
Upon the closing, certain of the Greenwich Funds would surrender all of the
outstanding Class C exchangeable preferred stock for cancellation and enter
into an amendment and restatement of their existing loan agreement with IMC,
pursuant to which the Greenwich Funds would make available to IMC an additional
$35 million in working capital loans.
On July 14, 1999, the Company entered into an Agreement to sell certain assets
to CitiFinancial Mortgage for $100 million. The Agreement was approved by the
Company's Board of Directors on July 30, 1999 and, as a result, the Acquisition
Agreement with the Greenwich Funds terminated. Consequently, the Greenwich
Funds is not obligated to provide an additional $35 million of loans to the
Company.
As discussed in Note 9 of Notes to Consolidated Financial Statements included
herein, "Events Subsequent to September 30, 1999", on November 12, 1999, the
shareholders of the Company approved the Agreement with CitiFinancial Mortgage.
Simultaneously, the Company, the Significant Lenders and the Greenwich Funds
entered into second amended and restated intercreditor agreements. Under these
agreements, the Lenders agreed to keep their respective facilities in place so
long as the obligations owed to those lenders are repaid according to an
agreed-upon plan, as described in the agreements. Each of the Significant
Lenders and the Greenwich Funds has indicated that, after November 15, 1999,
they will not make any additional advances under their facilities.
On November 15, 1999 the Company received $96 million from CitiFinancial
Mortgage for the sale of its mortgage servicing rights related to mortgage
loans which have been securitized, real property consisting of the Company's
Tampa, Florida headquarters building and the Company's leased facilities at its
Ft. Washington, Pennsylvania, Cherry Hill, New Jersey and Cincinnati, Ohio
office locations. Under the terms of the Agreement, the Company will receive an
additional $4 million in sales proceeds over the next two years from
CitiFinancial Mortgage for this sale if certain conditions are met.
In addition to the purchase price of $100 million, CitiFinancial Mortgage
reimbursed the Company for servicing advances made by the Company in its
capacity as servicer. As servicer of these loans, the Company is required to
advance certain interest and escrow amounts to the securitization trusts for
delinquent mortgagors and to pay expenses related to foreclosure activities.
The Company then collected the amounts from the mortgagors or from the proceeds
from liquidation of foreclosed properties. The servicing advances at September
30, 1999 consisting of $34.8 million made to pay escrow and foreclosure
servicing advances and $24.1 million made for delinquent interest servicing
advances were recorded as accounts receivable on the Company financial
statements. The amounts owed to the Company for reimbursement of servicing
advances made in connection with escrows and foreclosure approximated $42.6
million at November 15, 1999, and amounts owed to the Company for reimbursement
of servicing advances made in connection with delinquent loans were $9.8
million at November 15, 1999. The escrow and foreclosure servicing advances,
which are typically recovered by the servicer of loans over a period of up to
two years, were acquired by CitiFinancial Mortgage at a discount of 10.45%. The
delinquent interest servicing advances, which are typically repaid to the
servicer of loans monthly, were acquired by CitiFinancial Mortgage at a
discount of $3.0 million.
The proceeds from the sale of assets were used to repay certain indebtedness of
approximately
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$68.3 secured by certain assets of the Company upon consummation of the sale
of assets to CitiFinancial Mortgage and provide working capital.
After the sale of assets to CitiFinancial Mortgage and the disposition of its
remaining subsidiaries, the Company will essentially have no ongoing operating
business, but will continue to own assets consisting primarily of cash, accounts
receivable, mortgage loans held for sale, interest-only and residual
certificates and other assets that are pledged as collateral for the warehouse
finance facilities and term debt. The assets remaining after the sale of assets
to CitiFinancial Mortgage will be either held or sold by the Company to attempt
to realize the maximum value for these assets and repay its obligations,
including the warehouse finance facilities and term debt. As the Company has now
sold its mortgage servicing business and does not expect to originate any
additional loans, its future needs for cash have been greatly decreased. The
Company believes it has adequate resources for the limited activity of the
Company, although there can be no assurance that the Company will be able to
maximize the value of its remaining assets and have adequate proceeds and
resources to satisfy its creditors or that the Company will not seek bankruptcy
protection in the future.
In addition, the second amended and restated intercreditor agreements described
above provide a mechanism for the Company's principal secured creditors who are
parties to the intercreditor agreements to release to the Company for its
working capital needs a portion of the monthly receipts from the interest-only
and residual certificates serving as collateral for those lenders' loans.
RISK MANAGEMENT
The Company purchased and originated mortgage loans through November 15, 1999.
The Company has historically sold mortgage loans through securitizations or
whole loan sales. At the time of securitization of the loans, the Company
recognizes gain on sale based on a number of factors including the difference,
or "spread", between the interest rate on the loans and interest rate paid to
investors (which typically is priced based on the United States Treasury
security with a maturity corresponding to the anticipated life of the loans).
Historically, when interest rates rise between the time the Company originates
or purchases the loans and the time the loans are priced at securitization, the
spread narrows, resulting in a loss in value of the loans. To protect against
such losses, in quarters ended prior to October 1998, the Company hedged a
portion of the value of the loans through the short sale of United States
Treasury securities. Prior to hedging, the Company performed an analysis of its
loans taking into account, among other things, interest rates and maturities to
determine the amount, type, duration and proportion of each United States
Treasury security to sell short so that the risk to value of the loans would be
effectively hedged. The Company executed the sale of the United States Treasury
securities with large, reputable securities firms and used the proceeds received
to acquire United States Treasury securities under repurchase agreements. These
securities were designated as hedges in the Company's records and were closed
out when the loans were sold.
Historically, when the value of the hedges decreased, generally largely
offsetting an increase in the value of the loans, the Company, upon settlement
with its counterparty, would pay the hedge loss in cash and realize the
generally corresponding increase in the value of the loans as part of its
interest-only and residual certificates. Conversely, if the value of the hedges
increased, generally largely offsetting a decrease in the value of the loans,
the Company, upon settlement with its counterparty, would receive the hedge
gain in cash and realize the generally corresponding decrease in the value of
the loans
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through a reduction in the value of the related interest-only and residual
certificates.
The Company believes that its hedging activities using United States Treasury
securities were substantially similar in purpose, scope and execution to
customary hedging activities using United States Treasury securities engaged in
by several public companies, including its competitors.
In September 1998, the Company believes that, primarily due to significant
volatility in debt, equity and asset-backed markets, investors demanded wider
spreads over United States Treasury securities to acquire newly issued
asset-backed securities. The effect of the increased demand for the United
States Treasury Securities resulted in a devaluation of the Company's hedge
position that was not offset by an equivalent increase in the gain on sale of
loans at the time of securitization because investors demanded wider spreads
over the United States Treasury securities to acquire the Company's
asset-backed securities. In September 1998, the Company stopped hedging its
interest rate risk on loan purchases and in October 1998 the Company closed all
of its open hedge positions.
The Company uses a discount rate of 16% to present value the difference
(spread) between (i) interest earned on the portion of the loans sold and (ii)
interest paid to investors with related costs over the expected life of the
loans, including expected losses, foreclosure expenses and a servicing fee.
Based on market volatility in the asset-backed markets and the widening of the
spreads recently demanded by asset-backed investors to acquire newly issued
asset-backed securities, there can be no assurance that discount rates utilized
by the Company to present value the spread described above will not change in
the future, particularly if the spreads demanded by asset-backed investors to
acquire newly issued asset-backed securities continues to increase. An increase
in the discount rates used to present value the spread described above of plus
1%, 3% or 5% would result in a corresponding decrease in the value of the
interest-only and residual certificates at September 30, 1999 of approximately
2%, 6% and 10%, respectively. A decrease in the discount rates used to present
value the spread described above of minus 1%, 3% or 5% would result in an
increase in the value of the interest-only and residual certificates at
September 30, 1999 of approximately 2%, 7% and 13%, respectively.
INFLATION
Inflation historically has had no material effect on the Company's results of
operations. Inflation affects the Company most in the area of loan originations
and can have an effect on interest rates. Interest rates normally increase
during periods of high inflation and decrease during periods of low inflation.
Profitability may be directly affected by the level and fluctuation in interest
rates, which affect the Company's ability to earn a spread between interest
received on its loans and the costs of its borrowings. The profitability of the
Company is likely to be adversely affected during any period of unexpected or
rapid changes in interest rates. A substantial and sustained increase in
interest rates could have adversely affected the ability of the Company to
purchase and originate loans and affect the mix of first and second mortgage
loan products. Generally, first mortgage production increases relative to second
mortgage production in response to low interest rates and second mortgage
production increases relative to first mortgage production during periods of
high interest rates. A significant decline in interest rates could have
decreased the size of the Company's loan servicing portfolio by increasing the
level of loan prepayments. Additionally, to the extent servicing rights and
interest-only and residual
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certificates have been capitalized on the books of the Company, higher than
anticipated rates of loan prepayments or losses could have required the Company
to write down the value of such servicing rights prior to their sale on November
15, 1999 or require the writedown of interest-only and residual certificates
which could have a material adverse effect on the Company's results of
operations and financial condition. Conversely, lower than anticipated rates of
loan prepayments or lower losses could allow the Company to increase the value
of interest-only and residual certificates which could have a favorable effect
on the Company's results of operations and financial condition. Fluctuating
interest rates also may affect the net interest income earned by the Company
from the difference between the yield to the Company on loans held pending sales
and the interest paid by the Company for funds borrowed under the Company's
warehouse facilities. In addition, inverse or flattened interest yield curves
could have an adverse impact on the profitability of the Company because the
loans pooled and sold by the Company have long-term rates, while the senior
interests in the related securitization trusts are priced on the basis of
intermediate term rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which was amended
by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133." SFAS 133, as amended, is
effective for fiscal quarters of fiscal years beginning after June 15, 2000
(January 1, 2001 for the Company). SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative was designated as
part of a hedge transaction and, if it is, the type of hedge transaction. For
fair-value hedge transactions in which the Company hedges changes in the fair
value of an asset, liability or firm commitment, changes in the fair value of
the derivative instrument will generally be offset in the income statement by
changes in the hedged item's fair value. The ineffective portion of hedges will
be recognized in current-period earnings.
SFAS 133 precludes designation of a nonderivative financial instrument as a
hedge of an asset or liability. The Company has historically hedged its
interest rate risk on loan purchases by selling short United States Treasury
Securities which match the duration of the fixed rate mortgage loans held for
sale and borrowing the securities under agreements to resell. Prior to
September 30, 1998 the unrealized gain or loss resulting from the change in
fair value of these instruments has been deferred and recognized upon
securitization as an adjustment to the carrying value of the hedged mortgage
loans. SFAS 133 requires the gain or loss on these nonderivative financial
instruments to be recognized in earnings in the period of changes in fair value
without a corresponding adjustment of the carrying amount of mortgage loans
held for sale. Management anticipates that if the Company uses derivative
financial instruments to hedge the Company's interest rate risk on loan
purchases the Company will use derivative financial instruments which qualify
for hedge accounting under the provisions of SFAS 133.
The actual effect implementation of SFAS 133 will have on the Company's
statements will depend on various factors determined at the period of adoption,
including whether the Company is hedging its interest rate risk on loan
purchases, the type of financial instrument used to hedge the Company's
interest rate risk on loan purchases, whether such instruments qualify for
hedge
41
<PAGE> 44
accounting treatment, the effectiveness of the hedging instrument, the amount
of mortgage loans held for sale which the Company intends to hedge, and the
level of interest rates. Accordingly, the Company can not determine at the
present time the impact adoption of SFAS 133 will have on its statements of
operations or balance sheets.
Effective January 1, 1999, the Company adopted SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" ("SFAS 134"). SFAS 134 amends
SFAS No. 65, "Accounting for Certain Mortgage-Backed Securities" ("SFAS 65") to
require that after an entity that is engaged in mortgage banking activities has
securitized mortgage loans that are held for sale, it must classify the
resulting retained mortgage-backed securities or other retained interests based
on its ability and intent to sell or hold those investments. However, a
mortgage banking enterprise must classify as trading any retained
mortgage-backed securities that it commits to sell before or during the
securitization process. Previously, SFAS 65 required that after an entity that
is engaged in mortgage banking activities has securitized a mortgage loan that
is held for sale, it must classify the resulting retained mortgage-backed
securities or other retained interests as trading, regardless of the entity's
intent to sell or hold the securities or retained interest. The application of
the provisions of SFAS 134 did not have an impact on the Company's financial
position or results of operations.
YEAR 2000
The year 2000 (Y2K) problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Thus year 1999
is represented by the number "99" in many software applications. Consequently,
on January 1, 2000, the year will revert to "00" in accordance with many
non-Y2K compliant applications. To systems that are non-Y2K compliant, the time
will seem to have reverted back 100 years. So, when computing basic lengths of
time, the Company's computer programs, certain building infrastructure
components (including, elevators, alarm systems, telephone networks, sprinkler
systems and security access systems) and many additional time-sensitive
software that are non-Y2K compliant may recognize a date using "00" as the year
1900. This could result in system failure or miscalculations which could cause
personal injury, property damage, disruption of operations and/or delays in
payments from borrowers, any or all of which could materially adversely effect
the Company's business, financial condition or results of operations.
Beginning in 1998 the Company implemented an internal Y2K compliance task force.
The goal of the task force is to minimize the disruptions to the Company's
business, which could result from the Y2K problem, and to minimize other
liabilities, which the Company might incur in connection with the Y2K problem.
The task force consists of existing employees of the Company and an outside
consultant hired specifically to address the Company's internal Y2K issues.
The Company has conducted a company-wide assessment of its computer systems and
operations infrastructure, and is currently testing its systems to determine
their Y2K compliance. The Company presently believes those business-critical
computer systems which are not presently Y2K-compliant will have been replaced,
upgraded or modified prior to 2000.
Beginning in 1998, the Company initiated communications with third parties whose
computer systems'
42
<PAGE> 45
functionality could impact the Company. These communications included a
questionnaire requesting specific information from third parties with respect
to their systems and services related to Y2K compliance. The responses received
ranged from point-by-point responses to the Company's questionnaire, to global
response statements estimating compliance target dates, to direct compliance
letters. The Company received a 100% response rate in one or more of these
forms. All of the Company's material third-party vendors that are not currently
compliant have estimated compliance target dates from the end of the second
quarter of 1999 to the end of the third quarter of 1999. Based on these
responses, the Company believes that the material third-party vendors will be
Y2K compliant, although there can be no assurance that this will be the case.
The costs of the Company's Y2K compliance efforts are being funded with cash
flows from operations. In total, these costs are not expected to be
substantially different from the normal, recurring costs that are incurred for
systems development, implementation and maintenance. As a result, these costs
are not expected to have a material adverse effect on the Company's financial
position, results of operations or cashflows. To date, the Company has spent
approximately $300,000 on Y2K compliance and anticipates that Y2K expenses
through December 31, 1999 will be less than $500,000.
The Company has currently identified two material potential risks related to
its Y2K issues. The first risk is that the Company's primary lenders,
depository institutions and collateral custodians do not become Y2K compliant
before year end 1999, which could materially impact the Company's ability to
access funds and collateral necessary to operate its businesses. The Company is
currently accessing the risks related to these and other Y2K risks, and has
received some assurances that the computer systems of its lenders, depository
institutions and collateral custodians, many of whom are among the largest
financial institutions in the country, will be Y2K compliant by the year end
1999.
The second risk is that the external servicing system on which the Company
relies to service mortgage loans does not become Y2K compliant before year-end
1999. Failure on the part of the servicing system could materially impact the
Company's servicing operations. As of February 5, 1999, the Company received
confirmation that the servicing system had achieved Y2K compliance.
The Company is developing contingency plans for all non-Y2K compliant internal
systems. Contingency plans include identifying alternative processing platforms
and alternative sources for services and businesses provided by critical
non-Y2K compliant financial depository institutions, vendors and collateral
custodians. However, there can be no assurance that the Company's lenders,
depository institutions, custodians and vendors will resolve their own Y2K
compliance issues in a timely manner. The failure by these other parties to
resolve such issues could have a significant effect on the Company's operations
and financial condition.
The foregoing assessment of the impact of the Y2K problem on the Company is
based on management's best estimates at the present time and could change
substantially. The assessment is based upon numerous assumptions as to future
events. There can be no guarantee that these estimates will prove accurate, and
the actual results could differ from those estimated if these assumptions prove
inaccurate. The disclosure in this Section, "Year 2000", contains
forward-looking statements, which involve risks and uncertainties. Reference is
made to the first paragraph of Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included herein.
43
<PAGE> 46
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Management."
44
<PAGE> 47
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -
IMC is a party to various legal proceedings arising out of the conduct
of its business. Management believes that none of these actions, individually
or in the aggregate, will have a material adverse effect on the results of
operations or financial condition of IMC.
On December 23, 1998, seven former shareholders of Corewest sued IMC in
Superior Court of the State of California for the County of Los Angeles claiming
IMC agreed to pay them $23.8 million in cancellation of the contingent "earn
out" payment, if any, payable by IMC in connection with IMC's purchase of all
the outstanding shares of Corewest. In addition, several former shareholders of
Corewest alleged certain aspects of employment agreements with the Company were
breached. The former shareholders of Corewest, settled their employment
agreement claims and agreed to dismiss their claims under that lawsuit and
signed mutual, general and irrevocable releases for approximately $1.5 million.
The settlement was paid upon the consummation of the Agreement with
CitiFinancial Mortgage on November 15, 1999.
On June 17, 1999, the former shareholders of Central Money Mortgage
Co., Inc. ("Central Money Mortgage") sued the Company and its general counsel
in U.S. District Court for the State of Maryland claiming failure to perform on
certain oral and written representations made in relation to the Company's
acquisition of the assets of Central Money Mortgage. The case is in the
preliminary stages of discovery; however, based on consultation with legal
counsel the Company's management believes there is little merit in the
plaintiffs' claims and intends to defend such action vigorously.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities -
At September 30, 1999, the Company was not in compliance with certain
financial covenants related to its credit facilities with Paine Webber Real
Estate Securities, Inc., Bear Stearns Home Equity Trust 1996-1, and Aspen
Funding Corp. and German American Capital Corporation, subsidiaries of Deutsche
Bank of North America Holding Corp. (collectively, the "Significant Lenders").
As described in Note 9 "Events Subsequent to September 30,1999" to the
Consolidated Financial Statements included herein, the Company entered into a
second amended and restated intercreditor agreements with the Significant
Lenders which provide for the Significant Lenders to "stand-still" and keep
outstanding balances under their facilities in place, subject to certain
conditions, as the Company repays the obligations owed to these lenders
according to an agreed upon plan.
The Company had a $125 million committed warehouse facility with
Residential Funding Corporation ("RFC") which bears interest at LIBOR plus
1.25% and expired in August 1999. At September 30, 1999, approximately $29.9
million was outstanding under this facility. The RFC credit facility requires
the Company to comply with various financial covenants, including, among other
things, minimum net worth tests and a minimum pledged servicing portfolio. At
September 30, 1999, the Company's net worth, tangible net worth and pledged
servicing portfolio were below
45
<PAGE> 48
the minimum requirements under the covenants of the RFC credit facility.
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K -
A. Exhibits
27 - Financial Data Schedule (for SEC use only)
99 - Report of Independent Certified Public Accountants
B. Reports on Form 8-K
On July 22, 1999, the Company filed a Current Report on Form
8-K to report that the Company had entered into an Asset
Purchase Agreement with CitiFinancial Mortgage Company.
46
<PAGE> 49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: November 15, 1999 IMC MORTGAGE COMPANY
By: /s/ Thomas G. Middleton
Thomas G. Middleton, President, Chief Operating Officer, Assistant
Secretary and Director
By: /s/ Stuart D. Marvin
Stuart D. Marvin, Chief Financial Officer
47
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF IMC MORTGAGE FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 19,208
<SECURITIES> 0
<RECEIVABLES> 71,087
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,156
<DEPRECIATION> 8,011
<TOTAL-ASSETS> 993,587
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
39,541
<COMMON> 342
<OTHER-SE> (56,514)
<TOTAL-LIABILITY-AND-EQUITY> 993,587
<SALES> 37,377
<TOTAL-REVENUES> 110,400
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 321,862
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,477
<INCOME-PRETAX> (259,448)
<INCOME-TAX> 5,419
<INCOME-CONTINUING> (264,867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (264,867)
<EPS-BASIC> (7.81)
<EPS-DILUTED> (7.81)
</TABLE>
<PAGE> 1
EXHIBIT 99
Report of Independent Certified Public Accountants
To the Stockholders of
IMC Mortgage Company and Subsidiaries
We have reviewed the accompanying consolidated balance sheet of IMC Mortgage
Company and Subsidiaries as of September 30, 1999, and the related consolidated
statements of operations for the three-month and nine-month periods ended
September 30, 1999 and the consolidated statement of cash flows for the nine
month period ended September 30, 1999. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institution of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended and in our report dated March 31, 1999, we
expressed an unqualified opinion with an explanatory paragraph for a going
concern on these consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1998 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ Grant Thornton L.L.P.
Tampa, Florida
November 15, 1999
